At March 30, 2017, 1,058,011,175 shares of
the registrant’s common stock were outstanding.
PART
I
This
Form 10-K contains forward-looking statements that are subject to a number of risks and uncertainties, many of which are beyond
our control, which may include statements about our:
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business
strategy;
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financial
strategy;
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intellectual
property;
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production;
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future
operating results; and
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plans,
objectives, expectations and intentions contained in this report that are not historical.
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All
statements, other than statements of historical fact included in this report, regarding our strategy, intellectual property, future
operations, financial position, estimated revenues and losses, projected costs, prospects, plans and objectives of management
are forward-looking statements. When used in this report, the words “could,” “believe,” “anticipate,”
“intend,” “estimate,” “expect,” “project” and similar expressions are intended
to identify forward-looking statements, although not all forward-looking statements contain such identifying words. All forward-looking
statements speak only as of the date of this report. You should not place undue reliance on these forward-looking statements.
Although we believe that our plans, intentions and expectations reflected in or suggested by the forward-looking statements we
make in this report are reasonable, we can give no assurance that these plans, intentions or expectations will be achieved. These
statements may be found under “Management's Discussion and Analysis of Financial Condition and Results of Operations,”
“Business,” “Properties,” as well as in this report generally. Actual events or results may
differ materially from those discussed in forward-looking statements as a result of various factors, including, without limitation,
the risks outlined under “Risk Factors” and matters described in this report generally. In light of these risks
and uncertainties, there can be no assurance that the forward-looking statements contained in this filing will in fact occur.
ITEM
1. BUSINESS.
Organizational
History
OriginClear,
Inc. (“we”, “us”, “our”, the “Company” or “OriginClear”) was incorporated
on June 1, 2007 under the laws of the State of Nevada. We have been engaged in business operations since June 2007. We recently
moved into the commercialization phase of our business plan having previously been primarily involved in research, development
and licensing activities. Our principal offices are located at 525 South Hewitt Street, Los Angeles, California 90013. Our main
telephone number is (323) 939-6645. Our website address is www.OriginClear.com. In addition to announcing material financial information
through our investor relations website, press releases, SEC filings and webcasts, we also intend to use the following social media
channels as a means of disclosing information about our products, our planned financial and other announcements, our attendance
at upcoming investor and industry conferences, and other matters and for complying with our disclosure obligations under Regulation
FD:
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OriginClear’s
Twitter Account (https://twitter.com/OriginClear)
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OriginClear’s
Facebook Page (https://www.facebook.com/OriginClear)
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OriginClear’s
LinkedIn Page (https://www.linkedin.com/company/2019598)
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The
information we post through these social media channels may be deemed material. Accordingly, investors should monitor these accounts,
in addition to following the company’s press releases, SEC filings, public conference calls and webcasts. This list may
be updated from time to time.
We
have not incorporated by reference into this
report the information in, or that can be accessed through, our website
or social media channels, and you should
not consider it to be a part of this report.
Overview
of Business
OriginClear
is a leading provider of water treatment solutions and the developer of a breakthrough water cleanup technology. Through its wholly
owned subsidiaries, OriginClear provides systems and services to treat water in a wide range of industries, such as municipal,
pharmaceutical, semiconductors, industrial, and oil & gas. To rapidly grow this segment of the business, we strategically
acquire profitable and well-managed water treatment companies, which allow us to expand our global market presence and technical
expertise. To enable a new era of clean and socially responsible water treatment solutions, we invented Electro Water Separation™,
a breakthrough high-speed water cleanup technology using multi-stage electrochemistry, that we license worldwide to water treatment
equipment manufacturers. Water is our most valuable resource, and the mission of The OriginClear Group™ (the “Group”)
is to improve the quality of water and help return it to its original and clear condition.
OriginClear
Group™
Outsourcing
is a fast-growing reality in water treatment. Tougher regulations, water scarcities and general outsourcing trends are driving
industrial and agricultural water treatment users to delegate their water problem to service providers. As Global Water Intelligence
pointed out in their report on October 30, 2015,
“Water is often perceived as a secondary importance, with end-users
increasingly wanting to focus solely on their own core business. This is driving a move away from internal water personnel towards
external service experts to take control of water aspects.”
External service experts are typically small–privately
owned and locally operated. Consolidating these companies could lead to enormous economies of scale through sharing of best practices,
technologies, and customers.
Decentralization
is an even greater trend in water, similar to what has been seen in energy decentralization through solar and wind off-grid generation.
Water is becoming increasingly scarcer. McKinsey’s Transforming Water Economies forecasts that “without
action, global water demand could outstrip supply by up to 40 percent by 2030.”
Furthermore, existing water infrastructure in the United States is aging and water loss is increasing.
According
to Lux Research, updating our national water infrastructure will require an investment
of $270 billion – money that will be hard to pull together for projects that could
take decades to complete. In the meantime, centralized water systems are forcing water users to treat their
own water with small, modular water treatment systems.
OriginClear
is acquiring companies to help industrial water users treat their water themselves,
and often reuse it. We believe those companies are going to grow tremendously because of this
“local water” growth trend. We believe that assembling a group of water treatment companies
is an opportunity for significant growth and increased Company value for the stockholders.
Progressive
Water Treatment
On
October 1, 2015, OriginClear announced it had acquired 100 percent of Dallas-based Progressive Water Treatment Inc. (PWT), a profitable
and fast-growing designer, builder and service provider for a wide range of industrial water treatment applications.
This
marked the first transaction in OriginClear’s corporate strategy to rapidly acquire leading U.S. water service companies
focused on specialized water treatment. OriginClear aims to offer a complementary, end-to-end offering to serve growing corporate
demand for outsourced water treatment. The Company acquired PWT through the exchange of all issued and outstanding shares of PWT
for 10,000 shares of a new series of preferred stock, the Series B Preferred Stock, filed with the State of Nevada by the Company
on October 1, 2015.
PWT’s
Business
Since
1995, PWT has been designing and manufacturing a complete line of water treatment systems for municipal, industrial and pure water
applications. Known as an OEM (Original Equipment Manufacturer), PWT utilizes a wide range of technologies, including chemical
injection, media filters, membrane, ion exchange and SCADA technology, in turnkey systems that it designs and builds. PWT also
offers a broad range of services including maintenance contracts, retrofits and replacement assistance. In addition, PWT rents
equipment through contracts of varying duration. Customers are primarily served in the United States and Canada, with PWT’s
reach extending worldwide from Japan to Argentina to the Middle East.
On
January 12, 2016, we announced that Minnesota-based public utility, Xcel Energy (NYSE:XEL), awarded PWT a large-scale contract
for a boiler feedwater treatment system. The contract totaled nearly two million dollars and uniquely utilizes all Dow Chemical
(NYSE:DOW) products, including Ultrafiltration (UF), Reverse Osmosis (RO) and Electrodeionization (EDI) processes. On January
17, 2017, we announced that PWT had recently completed the installation and startup of this project. This was the third large
power plant project that PWT designed, built, installed and successfully started up, bringing the total such orders to approximately
$3.5 million for 2016.
On
November 21, 2016, OriginClear designated PWT as its first complete systems manufacturer, and plans to make PWT its first complete
systems manufacturer for both licensees and end-users. We believe that acquired companies in the Group can become captive distribution
points for its technology.
OriginClear
is currently in discussions for additional, accretive acquisitions of companies specializing in complementary markets and applications.
Technology
Licensing
For
its first eight years of operations, OriginClear focused uniquely on development and commercialization of its breakthrough Electro
Water Separation™ technology. In 2015, the technology went into commercial phase, and the Company launched it as OriginClear
Technologies, operating in parallel to the Group. The mission of OriginClear Technologies is to develop Electro Water Separation™
and achieve its full recognition as an international industry standard in treating our increasingly complex wastewater treatment
challenges. For this purpose, OriginClear Technologies relies on an ongoing strong R&D and engineering activity for the development
of its technology, while actively building its network of partners, licensees and joint venture partners for commercial development.
A key element of this strategy is OriginClear (HK), OriginClear’s wholly-owned subsidiary in Hong Kong that manages Asia-Pacific
market development, with a special focus on China sales and manufacturing. While OriginClear Technologies focuses on developing
and monetizing the Company’s internally-developed Intellectual Property, best practices and trade secrets, it is expected
to do the same for technologies which may come in the future with the Group’s acquisition of profitable water treatment
companies.
The
Technology
OriginClear
is the proprietary developer of Electro Water Separation™ (EWS), the high-speed, primarily chemical-free technology to clean
up large quantities of water. It removes oils, suspended solids, certain dissolved solids, and pathogens, in a continuous and
energy-efficient process. The Company originally developed this technology to solve the challenge of removing microalgae from
a highly dilute state. The EWS technology remains the most efficient non-chemical, continuous mechanism for the concentration
of live algae cells from water.
The
electro-chemical process was then extended, first to cleaning up oil and gas waste water and most recently, to industrial, agricultural
and urban effluents. These water treatment applications are entirely electrochemical in nature and do not rely on algae for its
cleaning capabilities, which is a separate application of the technology. EWS is designed to be an early step in removal of oils,
solids and pathogens; reducing the work that more expensive, downstream processes such as Ultra Filtration or Reverse Osmosis
must do, therefore enabling more cost-efficient and high-volume water cleanup overall.
In
March of 2016, OriginClear announced that it had successfully developed and proved Advanced Oxidation for its breakthrough water
cleanup system, Electro Water Separation™, or EWS. University laboratory tests have shown that EWS with Advanced Oxidation
(EWS:AOx™) can now extract dissolved contaminants, which are otherwise difficult to remove without chemicals such as chlorine.
Overall, the system has shown a dramatic reduction in Total Organic Compounds which includes all forms of organic contamination,
solids, miscible or dissolved, to meet new stringent global discharge requirements. Even prior to this innovation, EWS, combined
with an iSep ultrafiltration membrane, demonstrated up to a 99.9% removal of dispersed oil, 99.5% removal of suspended solids
as well as successful treatment of chemical oxygen demand (COD), including specific contaminants such as ammonia, phosphorus and
hydrogen sulfide. These results were presented at the International Water Conference in 2015. In 2016, OriginClear filed for a
patent to protect the new AOx process and system configuration.
Today,
we are capable of pairing the two technologies as EWS:AOx™, or separately, as the application requires. OriginClear believes
that its technology is valuable to the industry because it has the potential to greatly extend the life of membranes and filters
by effectively treating very dirty, oily water, while reducing chemical use significantly.
OriginClear
also believes that its Advanced Oxidation technology will help neutralize harmful micro-contaminants, such as industrial solvents,
which is difficult or impossible to achieve with other technologies.
Overall,
the system has shown a dramatic reduction in Total Organic Compounds which includes all forms of organic contamination, solids,
miscible or dissolved, to meet new stringent global discharge requirements.
Our
technology partnership with California State University at Bakersfield (CSU Bakersfield) continued in 2016. On March 16, 2016,
we announced that recent laboratory studies carried out under that partnership indicated the effectiveness of EWS:AOx, as measured
by Reactive Oxygen Species (ROS) generation. ROS are the strongest oxidants that can be used in water. Their confirmed presence
indicates the degree to which the system is able to remove organics from water without chlorine-generated Disinfection Byproducts,
which are considered harmful in a waste water treatment system.
“EWS
already generates 370mg per second of gas, which is more than twice the amount needed for the removal by electro-flotation of
a 2000 mg/l solids contents wastewater stream,” said Dr. Luis Edgar Cabrales Arriaga, assistant professor at the Department
of Physics and Engineering at CSU Bakersfield. “Now, we have confirmed that EWS with Advanced Oxidation also produces more
than 330 g/m
3
of mixed ROS species, such as hydrogen peroxide, for a similar average energy consumption of 1 kWh per
m
3
of treated water.”
Recent
Developments
We
have been engaged in our business operations since June 2007, and to date, we have been primarily involved in research and development
activities, with licensing to OEMs, and sales of pilot and demonstration equipment beginning in June of 2010. Commercial sales
by both OriginClear and its licensees and joint ventures began in 2014.
Our
technology integrates easily with other industry processes. We have begun to embed our technology into larger systems through
licensing and joint ventures.
In
2016, OriginClear accomplished the following:
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Its
PWT subsidiary upgraded water systems for three large public utilities, including Xcel
Energy (NYSE:XEL), raising the total for these utility-scale water projects to approximately
$3.5 million. By modernizing these plants, capacity increased significantly while labor
and chemical costs were reduced.
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Its
French joint venture, Ennesys, completed a field pilot in Dubai of its FREEWATERBOX®
modular waste water treatment system and partnered with a leading landscaping company
in the GCC (Gulf Cooperation Countries) to build the first FREEWATERBOX intended to recycle
20 tons of food waste per day into clean water and high value fertilizer.
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OriginClear
launched a joint venture in Texas to market an injectable crude oil sweetening liquid,
produced with OriginClear technology. Sweet crude commands a 10% premium over sour.
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Its
joint venture in Malaysia began working with major growers to demonstrate its ability
to treat Palm Oil Mill Effluent (POME). Totaling more than 65 million metric tons annually,
POME effluent is widely recognized as a major environmental concern because its contamination
level can be 100 times higher than domestic sewage.
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OriginClear’s
China subsidiary entered commercial negotiations after a successful demonstration
of its ability to clean up the contaminants in ‘black water’ leachate coming
out of landfills. OriginClear is continuing to pilot its process for a landfill leachate
treatment system in China.
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A
regional water treatment facility in California’s Kern County commissioned a 60-day
test of OriginClear’s technology to treating produced water from oil operations.
Extensive third-party testing demonstrated that the technology was a technical success.
OriginClear is currently in discussions with licensees and large end-users for the commercialization
of produced water treatment in this leading region for oil production.
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OriginClear
was awarded the prestigious China BlueTech Award in the “Most Innovative
Technology” category. Co-organized by Mandarin Environment and BlueTech™
Research, the China BlueTech™ Awards recognized OriginClear’s EWS technology
for its potential to break through in both the Chinese and international markets.
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North
America
Produced
water treatment
On
August 10, 2016, OriginClear announced that OriginClear partner ECT Services & Solutions (ECT), unveiled a complete, modular
system (“ECOPOD”), in operation at an oil field near Bakersfield, California, to achieve “Produced water to
irrigation grade” in a single modular system. The ECOPOD pilot scale system uses OriginClear’s Electro Water Separation™
(EWS), requires no chemicals and reliably processes 340 barrels per day of oilfield produced water with minimal operator supervision.
Presenting
at the “Tackling the Drought: Exploring Safe, Innovative Water Sources” conference at California State University
at Bakersfield (CSUB), sponsored by the California Independent Petroleum Association and the California Energy Research Center,
Talbott Howard, CEO and Founder of ECT, showed how ECOPOD System 1.0 can successfully and competitively treat produced water and
recycle it into irrigation quality water for local beneficial reuse.
Following
this achievement, OriginClear published a case study, demonstrating that extensive third-party testing demonstrated that the Bakersfield
pilot program was a technical success (http://www.originclear.com/pdf/originclear-in-kern-2016.pdf).
We
are in commercial discussions with ECT and two other potential licensees to follow up on the success of this program.
Crude
oil sweetening
On
April 15, 2016, OriginClear announced that Cobalt Aqua Control LLC (Cobalt) recently shipped its first commercial sale of 15 barrels
of an injectable crude oil sweetening liquid, produced with OriginClear technology, to an oil operator in South Texas.
Cobalt
is a developer of oil and gas technology and remediation solutions based in Houston, TX. OriginClear licensed its Advanced Oxidation
(EWS:AOx™) technology to Cobalt, and, through a wholly-owned subsidiary, has a significant membership interest in Cobalt.
Cobalt’s process produces a liquid that can significantly improve oil recovery, reduce corrosive gas in the crude stream
and increase overall ROI for operators.
Known
as H2S-Neutralizer™ (H2S-N™), this injectable liquid has demonstrated a dramatic improvement in oil recovery ratios,
as evidenced by a stable increase of well-head pressure. In addition, H2S-N has been shown to significantly reduce hydrogen sulfide
(H2S) concentration in the crude stream.
Europe,
Middle East and Africa
France
and Gulf Cooperation Countries (GCC)
We
are a joint venture partner in Ennesys, a French developer of algae-based waste management systems. In mid-2013, we installed
a prototype EWS Waste unit at the Ennesys demonstration site which can process liquid waste, generating clean, nitrate-rich water
to feed algae grown on the building’s roof as an energy source. In late 2013, we transferred three of our non-core
patent applications to Ennesys.
In
2016, the FREEWATERBOX® developed by Ennesys completed a field pilot in Dubai. It is based on the use of micro-algae for the
removal or biotransformation of pollutants, including nutrients and xenobiotics from wastewater and CO2 from waste air, while
producing a soil conditioner for the enhancement and protection of agricultural crops.
Recently,
Ennesys announced that it entered into a partnership with a leading landscaping company in the GCC (Gulf Cooperation Countries)
to build the first FREEWATERBOX that will recycle 20 tons of food waste per day into high value liquid fertilizer, compost and
algal biostimulant.
We
continue to support Ennesys with technology and public communications although this joint venture is currently not generating
revenue for the Company.
France
and North Africa
On
January 5, 2017, OriginClear announced that it has responded to EU-level water infrastructure mandates by African governments
by working with French engineering company UltraEpur.
UltraEpur
contacted us to help rapidly clear up contaminated industrial water, beginning in Algeria, where the government intends to upgrade
to developed-world water standards rapidly. We have since entered a technology license agreement, and UltraEpur purchased a laboratory
demonstration unit.
OriginClear
in Asia
China
In
December 2014, OriginClear announced that it launched a subsidiary, OriginClear (Hong Kong) (OCHK) and granted it a master license
for the People’s Republic of China, with non-exclusive rights for Asia. It has since been renamed as OriginClear Technologies
(Hong Kong).
On
December 3, 2015, OriginClear and OCHK announced that OCHK had agreed with Mr. Ming Xu, an inventor and owner of a construction
materials factory in mainland China to launch sales and manufacturing joint ventures (JVs) in the People’s Republic of China
and the Republic of China (Taiwan). Mr. Xu made an initial payment of $150,000 at that time. On September 19, 2016, in response
to new developments recent progress in building a network of multiple licensees, the parties agreed to a Partnership Memorandum
of Understanding (MOU) pursuant to which the Company and Xu may enter into a license agreement and may launch an OriginClear Excellence
Center, a joint venture intended to support licensees with technology training and maintenance, marketing and communications efforts,
and providing additional resources such as synergistic third party technologies. However, there cannot be any assurance that any
definitive agreements with Xu will be entered into.
On
March 16, 2016, we announced that we were in the commercial negotiation phase after a successful demonstration of our ability
to clean up the ‘black water’ contaminants coming out of landfills. EWS alone achieved a 75% reduction in leachate’s
Chemical Oxygen Demand, a marker of contamination level that includes suspended solids and dissolved contamination as well, and
70% reduction in Ammonia. Landfills in China and elsewhere generate tens of thousands of tons of leachate daily. This leachate,
also known as black water, is a major challenge in wastewater treatment. OriginClear is continuing to pilot its process for a
landfill leachate treatment system in China.
On
June 13, 2016, OCHK entered into a Joint Development and Commercialization Agreement with Hong Kong-based water treatment engineering
and manufacturing firm Park Rich Environmental Technology Co., Ltd. (Park Rich), based on specific purchase orders from time to
time and upon the terms that the parties agree to. In February, 2016, OriginClear had also signed a distribution agreement with
Park Rich affiliate, Jovial Technology. Park Rich helped showcase OriginClear’s technology at the major water conference,
Aquatech China, in Shanghai between June 15 and June 17, 2016.
At
this show, OriginClear was awarded the prestigious China Blue Tech Award, as organized by BlueTech Research and Mandarin Environment
in partnership with Aquatech China.
The
third China partner named in 2016, with Xu and Park Rich, was DongYuan Environment Technology (DY), founded in 2009, focusing
on heavy polluted industrial wastewater treatment, water recycling, brine processing, sludge drying and agriculture farming wastewater
treatment. According to DongYuan, in 2012 the Chinese government honored it as a “High-New Technology Enterprise”.
On September 19, 2016, we announced that DY placed an order for its first OriginClear demonstration system.
Malaysia
On
March 22, 2016, OCHK agreed to launch a Joint Venture (JV) with Osmocell Malaysia SDN Bhd, a Malaysian engineering and manufacturing
company for water purification systems. The JV company, OriginClear Water Solutions SDN Bhd (OWS) is now operational. OWS plans
to target the Palm Oil Mill Effluent (POME) treatment market in Malaysia. Totaling more than 65 million tonnes annually, POME
effluent is widely recognized as a major environmental concern because its contamination level can be 100 times higher than domestic
sewage. Osmocell is currently proving the effectiveness of a system based on EWS in commercial pilots.
Looking
Ahead
In
2017, OriginClear intends to achieve the following:
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Further
growth for PWT in large capacity system sales.
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Serving
end-users and licensees with complete systems that incorporate our breakthrough technology.
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Revenue
growth from our joint ventures and licenses in the oil industry in the USA, in industrial
applications in Asia, and in water purification applications in the Middle East.
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Continued
efforts to acquire successful, profitable water service companies that can benefit from
the major outsourcing and decentralizing trend in industrial water treatment.
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Corporate
Developments
On May 1, 2016, OriginClear
moved its headquarters from a warehouse and office facility on Adams Blvd in Los Angeles near Culver City, to the La Kretz Innovation
Campus of the Los Angeles Cleantech Incubator (LACI) on Hewitt Street in downtown Los Angeles. This move refocused OriginClear
headquarters activities on administration and science, making use of LACI’s extensive research and prototyping facilities.
Manufacturing outgrew the Adams location and can now be accomplished at the PWT subsidiary in McKinney Texas, a contractual assembly
location in south Los Angeles, and at the Company’s China subsidiary.
On
October 7, 2016, OriginClear participated in the official launch of the La Kretz Innovation Campus, presided over by the Mayor
of the City of Los Angeles, Mayor Eric Garcetti.
On
June 6, 2016, OriginClear announced that the Financial Industry Regulatory Authority (FINRA) had approved a change of the company’s
stock ticker symbol to “OCLN”.
Our
Strategy
The
Group
The
OriginClear Group’s strategy is to grow incrementally by focusing on the $500 billion water treatment market, acquiring
the hands-on service suppliers in this market. It intends to develop a network of these wholly-owned water treatment companies
to meet the needs of end users from all industries with a full range of treatment technologies. Due to increased regulation, water
treatment recycling challenges and a need to focus on their own core business, many water users today are outsourcing their water
treatment needs to outside experts. In addition, we have identified a major trend in decentralization of water treatment, which
we believe will cause small water service companies to grow. There will be significant synergies within the Group as technology,
manufacturing expertise, market knowledge, projects and opportunities are shared. The target acquisitions must be accretive in
nature with solid sales growth and profitability. The acquired companies must have a solid management team to accelerate their
previous growth with excellent customer service. Initially, the acquisition focus is in the U.S. but will be expanded internationally
in a few years.
Technology
Licensing
We
are licensors of our technology. We grant non-exclusive licenses to OEMs (Original Equipment Manufacturers), and participate in
joint ventures, contributing our technology and our commitment to each joint venture’s business focus. We have also begun
to grant Master Licenses, beginning with our wholly-owned subsidiary in Hong Kong.
Technology
Applications
The
Algae Industry
Much
of the petroleum that powers our world comes from ancient algae that decomposed hundreds of millions of years ago. Like petroleum,
algae can be turned into transportation fuels, chemicals, pharmaceuticals and plastics; but unlike petroleum, algae is a food
as well; and absorbs CO2 in the growth process, about two tons of CO2 for every ton of algae produced. Algae is one of nature′s
most efficient and versatile photosynthetic factories. It has a short growing cycle and does not require arable land or fresh
water, which makes it very attractive as an energy feedstock, or as a healthy and natural feed or fertilizer. But a major barrier
to commercialization is the difficulty in extracting small amounts of algae biomass from very large quantities of water at a reasonable
cost and without using more energy than can be created. And the quantities of water required can be very large indeed: algae-to-water
ratio can be as high as 1-to-1000. Conventional water separation technologies such as centrifuges and membranes may work on a
limited basis, but can be too expensive for large-scale use. Additionally, centrifuges are typically a batch process.
Early
Harvesting Technology: Single Step Extraction™
OriginClear’s
early algae harvesting technology was Single Step Extraction™ (SSE). Today, SSE is the first stage in EWS and it powers
our sanitation and growth optimizing applications.
Algae
For Feed
In
2013, OriginClear developed demonstration systems for the aquaculture industry and showed these at a public event on December
18, 2013 at Aqua Farming Tech, a working fish farm in Thermal, California. Aqua Farming Tech remains a testing site for OriginClear’s
aquaculture activities. In 2014, OriginClear assigned its aquaculture initiative to the algae division to focus on the growing
opportunities in the Algae For Feed marketplace. In April 2014, OriginClear announced that it had agreed to a collaborative
exchange of equipment and information with the Catalina Sea Ranch, the first offshore shellfish ranch in U.S. Federal waters.
OriginClear provided a demonstration-scale Model 12 system to Catalina Sea Ranch, which has used it to treat incoming seawater
and harvest algae to feed its shellfish nursery and selective breeding program. Catalina Sea Ranch provides independent data on
the efficiency and use of the machine, and gives OriginClear access to its nursery for field research. OriginClear aims to continue
to support the growing algae industry in the fast-growing animal and fish feed sector.
Algae
For Soil Enrichment
In
2015, OriginClear began developing the use of algae for soil enrichment with partner AlgEternal. Based on AlgEternal’s field
tests, it believes that its pure algae concentrate, harvested with OriginClear technology, may reduce conventional fertilizer
cost by up to 40 percent.
In
2016, the FREEWATERBOX® developed by OriginClear joint venture Ennesys completed a field pilot in Dubai. It is based on the
use of micro-algae for the removal or biotransformation of pollutants, including nutrients and xenobiotics from wastewater and
CO2 from waste air, while producing a soil conditioner for the enhancement and protection of agricultural crops.
The
Oil and Gas Industry
The
oil and gas industry is one of the most water-intensive industries in the world. It is both a large consumer of fresh water and
producer of contaminated water, which is also a potential asset for drought-affected regions. Water is produced and used
in large quantities in oil and gas operations. According to the U.S. Department of Energy, an average of 3 barrels of contaminated
water is generated for each 1 barrel of oil produced. In the United States, the average is 7 barrels of water. Greentech Media
reports that energy companies pay between $3 to $12 to dispose of each barrel of produced water. We believe OriginClear’s
high speed, low energy and primarily chemical-free Electro Water Separation™ technology is ideally suited to help clean
up the large quantities of water used in oil and gas operations. A 2009 report on modern shale gas by the Groundwater Protection
Council, "Modern Shale Gas Development in the United States: A Primer," stated that “the amount of water needed
to drill and fracture a horizontal shale gas well generally ranges from about 2 million to 4 million gallons, depending on the
basin and formation characteristics.” While fracking technology promises to unleash an abundant supply of inexpensive natural
gas to power the modern world, water is quickly becoming a serious limiting factor. Additionally, the water returns as “frack
flowback” laced with petroleum and contaminants that require rapid and efficient removal for disposal and recycling.
Oil
and Gas Water Cleanup Solutions
The
Company has completed successful trials in the Niobrara gas fields of Colorado, the Permian light crude oil fields of West Texas
and the Monterey heavy crude oil fields in California. The Bakersfield testing was particularly interesting because it demonstrated
that produced water from heavy oil in California’s Monterey Shale Formation could technically and economically be reprocessed
for Cyclic Steam Stimulation in oil wells and agricultural irrigation water. EWS removes up to 99.9% of all free and emulsified
oil, and 99.5% of suspended solids from oil & gas wastewater, while also removing certain dissolved contaminants that will
co-precipitate, and continuously disinfecting bacteria. In the oil and gas application, OriginClear’s core EWS technology
is typically supplemented with ‘heavies’ removal on the front end, intelligent controls, and a final polishing system,
for a complete solution.
All
systems can include a common SCADA control system with touch screen which will allow automatic control of the process as well
as remote monitoring and alarms. Through its licensees and joint venture partners, OriginClear is making EWS available to customers
such as: E&P operators, service companies, disposal well operators and water treatment companies.
Downstream
Integration
While
OriginClear’s EWS is designed to deliver essentially “clear” water, additional processing is often needed to
meet the requirements of specific applications. In such cases, OriginClear works with the manufacturers of downstream solutions,
such as TriSep, Dow Chemical or their OEMs, and other manufacturers, to integrate processes such as Ultra- or Nano-Membrane Filtration,
to achieve, for example, flowback water treatment to a standard acceptable for “new” frack water. This complete water
treatment solution is available through OriginClear’s licensees and joint venture partners.
Industrial
and agricultural Waste Water
Perhaps
the largest of all opportunities for EWS is in cleaning up industrial, agricultural and urban effluents. EWS is an electrically-based
technology that can target any application in waste water treatment, with a focus on the “clarity” stage of removing
oils, suspended solids and bacteria. EWS technology has been shown to effectively clean organics such as petroleum, achieving
up to 99.9% reduction in free oil and a 99.5% reduction in suspended solids, and reduction of up to 99% of bacteria and other
invaders, for clean and sanitized effluents. Another EWS prototype has been demonstrated in China for landfill leachate treatment.
EWS alone achieved a 75% reduction in leachate’s Chemical Oxygen Demand, a marker of contamination level that includes suspended
solids and dissolved contamination as well, and 70% reduction in Ammonia.
The
Advanced Oxidation complement to EWS. Known as EWS:AOx™, announced in March of 2016, shows promise to neutralize micro-contaminants
such as ammonia, hydrogen sulfide, and dioxane, an industrial solvent which has been found extensively in aquifers in Southern
California and elsewhere. We also believe that EWS:AOx can be valuable in neutralizing many other anthropogenic organic compounds
(AOCs), including endocrine disrupting chemicals (EDCs). Further testing, with the assistance of a regional water district, is
underway at our headquarters in the Los Angeles Cleantech Incubator (LACI).
Competitors
The
Algae Industry
Companies
in the new algae fuels industry tend to organize themselves as integrated producers and to keep their intellectual property to
themselves. Our strategy, on the other hand, is to share our technology widely through licensing and private labeling. With respect
to our algae harvesting and sanitizing applications, we are aware that Alfa Laval, Algix, Aurora Algae, Cavitation Technologies,
Evodos, New Oil Resources, Open Algae LLC, Perlemax, Valicor, Smartflow Technologies, Westfalia and World Water Works, among others,
offer competing technologies. OriginClear believes there is synergy between its process and many of these competing technologies,
where EWS can do the “heavy lifting” as the first, high-speed concentration stage, with other processes offering further
concentration.
The
Oil and Gas Industry
Market
and Trends
The
oil and gas industry is a major source of waste water. In the US, it generates about seven barrels of produced water for each
barrel of oil. More recently the flowback water from fracking operations is a short term, but intensive, source of waste water
as well. Historically the solution to the treatment of produced and frack flowback water has primarily been to dispose it
in permitted injection wells. Many technologies have existed for the “filtering” of these waters prior to injection,
but with limited ability to remove contaminants. More recently, because of the cost of water management, environmental concerns
and regulatory requirements, these “filtering” technologies are being reviewed and new technologies are being developed;
the goal being to reduce water management costs and to dramatically reduce the volume of disposal. Not only can the oil and gas
industry look forward to reduced water management costs, but environmental impacts will have been reduced; a win-win for all concerned.
Accordingly, the industry is increasingly recycling its produced and frack flowback waters for use in water flooding, cyclic steam
stimulation, enhanced oil recovery, new hydraulic fracturing operations, irrigation and even drinking water. Recycling is becoming
the economic choice as technologies have advanced and the cost of water treatment has decreased; while at the same time, the cost
of disposal has risen (according to Shale Play Water Management magazine, costing between $1.75 and $26.75 per barrel of water).
In addition, intense lobbying by environmental groups in front-line regions like California and New York is driving treatment
and reuse as a way to make fracking and drilling in general more acceptable, especially in the midst of California’s historic
drought. Markets-and-markets reports that the global produced water treatment market size is estimated to exceed $8 billion by
2019. The major factors responsible driving the growth of this market include the energy sector growth in Africa and the Middle
East, along with increasing strictness of environmental policies. According to Bluefield Research, wastewater treatment spending
for hydraulic fracturing is expected to grow almost three-fold, from $138 million in 2014 to $357 million in 2020 in the U.S.
Bluefield cites water supplies increasingly at risk, tighter regulations emerging in key states, and costs of disposal on the
rise as factors contributing to the substantial rise in water treatment and reuse, which is expected to account for 27 percent
of total produced and flowback water by 2020, about double current levels.
Competing
Technologies
These
“filtering” technologies range from simple decanting to distillation. They are typically implemented as a multi-stage
process to attain water quality standards for the planned reuse. EWS can act as a pre-treatment stage for any of these multi-stage
processes. While EWS can remove the emulsified and free oil, suspended solids and bacteria from the water stream, these subsequent
stages can remove the heavy metals, scaling chemicals, salts and other natural and introduced chemicals. EWS can reduce fouling
of these filters and membranes, making subsequent or downstream processes complementary to EWS and creating a strategic opportunity
to collaborate. Direct competitors using some form of electro-coagulation technologies include: Halliburton, Watertectonics, Bosque,
Ecolotron, Quantum-ionics, Kaselco, Baker Hughes, RecylClean, Axine Water and Ecosphere. Other companies also compete with EWS,
but use other technologies that can involve chemical coagulants, batch operation or a high level of consumables. These include:
Aqua-Tech, Aqua-Pure, CTI, Purifics, HydroZonics, Myclex, Osmonics, Filterboxx, MECO, Layne, 212 Resources, Veolia, Fountain Quail,
Pall and Altela.
The
Waste Industry
Waste
water is a growing problem as industry, agriculture and communities expand, droughts force the need for reclamation, and aquifers
and reservoirs become polluted. Meanwhile, previously lightly-regulated regions of the world are enforcing much stricter environmental
regulations. Overall, water security is one of the greatest challenges of our time. According to analysts at McKinsey & Company
(
Charting our Water Future, November 2009 report
), the world will see a 40 percent gap between water supply and demand
by 2030. Industrial uses account for a startling amount of water consumed around the world. According to the United Nations (The
World Business Council for Sustainable Development, March 2006 report) industry consumes nearly 60 percent of available water
in high-income countries. Curbing fresh water consumption at the industrial level has the potential to significantly improve water
security worldwide. In general, we believe that OriginClear has one or more advantages over some of the potential competitors,
in that our process does not primarily use chemicals, is highly scalable on a continuous flow process, and may be significantly
lower in energy consumption. We believe our technology may, in some cases, complement these companies’ offerings, however
there is no guarantee that our technology will produce more efficiently or cost-effectively than these other technologies. To
our knowledge, there is no company or technology available on the market providing a similar level of synergistic integration
of the three processes that we implement under a single configuration: Electro Coagulation, Electro Flotation (these two being
combined in our process as EWS) and Advanced Oxidation (AOx).
Taken
separately, these processes are marketed as follows:
Electro
Coagulation, though being a relatively new technology, has been known and available in the market for approximately 30 years.
Companies like Watertectonics, Kaselco, Powel Water or H2O Technologies offer engineered electrocoagulation systems to the market.
There are also a number of one-off electrocoagulation systems in operation worldwide. Electro Flotation is an emerging technology
that is mostly seen in scientific publications, as an alternative to more conventional Dissolved Air Flotation (DAF) systems.
DAF systems are available worldwide from numerous suppliers including but not limited to, Veolia Water, Ecologix, RWL Water, SAWater,
WPL International, World Water Works, etc. and almost exclusively rely on massive injection of chemical coagulants for their efficiency.
EWS has been designed with versatility in mind. It is equally efficient when used with sacrificial anodes, slowly releasing the
anode’s metal ions that will provide the coagulation effect, or with Dynamically Stable Anodes (DSA) that will have a catalytic
role on water matrix preparation with or without chemical coagulants. In both cases, the patented reactors design marks a significant
evolution in the industry, featuring an enhanced mixing function, a better mass transfer and an easier maintenance and replacement
when using sacrificial anodes.
Advanced
Oxidation, not unlike Electro Coagulation, has been known to scientists for approximately 40 years. However, the few Advanced
Oxidation technologies being commercially in use mostly rely on catalyst injection and/or on a combination of catalysts and UV
irradiation for their process. They are not as streamlined as EWS:AOx, which is solely an electrochemical process, and these processes
require extensive preparation of the water matrix to be efficient. MIOX, Blue Earth Labs are marketing similar systems for niche
applications, without offering the additional suspended solids removal functions featured by EWS. Other identified competitors
are Lenntech, SSWM, Esco International, and Spartan Water Treatment. Here again, OriginClear’s reactors’ specific
design is a major evolution. Contact area, mass transfer, high turbulence caused by shear stress all help in enhancing oxidation
reactions and, furthermore, the two variations of the tubular reactor design respectively have a major role in direct oxidation,
mostly targeting “Hard COD”, contaminants that are known for being difficult to degrade, and, additionally, indirect
oxidation, widely used for less difficult reactions.
In
summary, while competitors exist for each of the three phases of our technology, we have not detected any that does all three
in one synergistic system.
Government
and Environmental Regulation
We
are not aware of any existing or probable government regulations that would negatively impact on our operations. As a licensor
and/or provider of water treatment equipment, we are not subject to government regulations for the removal of oils, solids and
pathogens from water, other than normal safety standards and certifications (such as UL or CE) for goods that we manufacture for
demonstrations and joint ventures, and our product lines.
However, our prospective customers are subject to local,
state and federal laws and regulations governing environmental quality and pollution control. To date, our compliance with government
regulations has had no material effect on our operations, capital, earnings, or competitive position, and the cost of such compliance
has not been material. We are unable to assess or predict at this time what effect additional regulations or legislation could
have on our activities.
Intellectual
Property
Our
business is also based on developing a strong intellectual property portfolio and establishing a network of OEM distributors and
core technology licensees. We have filed the following patent and trademark applications:
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On
July 28, 2007, we filed a utility patent application with the USPTO to protect the intellectual property rights for “Algae
Growth System for Oil Production”. The inventors listed on the patent application are Nicholas Eckelberry and Riggs
Eckelberry, our founders. We are listed as the assignee. On January 29, 2009 the application published with the publication
number US 2009-0029445 A1.
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On
May 23, 2008, we filed a utility patent application with the USPTO to protect the intellectual property rights for “Apparatus
And Method For Optimizing Photosynthetic Growth In a Photo Bioreactor”. The inventors listed on the patent application
are Steven Shigematsu and Nicholas Eckelberry. We are listed as the assignee. On November 26, 2009 the application published
with the publication number US 2009-0291485 A1.
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On
July 26, 2009, we filed a provisional patent application with the USPTO to protect the intellectual property rights for “Procedure
For Extraction Of Lipids From Algae Without Cell Sacrifice”. The inventors listed on the patent application are Paul
Reep and Michael Green. We are listed as the assignee. This application was re-filed as a provisional application on August
13, 2010.
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On
April 20, 2010, we filed a PCT application with the USPTO to protect the intellectual property rights for “Systems,
Apparatus and Methods for Obtaining Intracellular Products and Cellular Mass and Debris from Algae and Derivative Products
and Process Use Thereof”. The inventors are Nicholas Eckelberry, Michael Green, and Scott Fraser. We are listed as the
assignee. On October 10, 2010 the application published with the publication number WO/2010/123903.
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On
June 18, 2010, we filed a provisional patent application with the USPTO to protect the intellectual property rights for “Bio-Energy
Reactor”. The inventors listed on the patent application are Michael Green, and Nicholas Eckelberry. On December 22,
2011, the application was published with the publication number US 2011-0308962 A1. We are listed as the assignee.
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On
October 17, 2010, we filed a provisional patent application with the USPTO to protect the intellectual property rights for
“Methods and Apparatus for Dewatering, Flocculation and Harvesting of Algae Cells”. The inventors listed on the
patent application are Michael Green, Nicholas Eckelberry, Scott Fraser and Brian Goodall. We are listed as the assignee.
On May 24, 2012, the application was published with the publication number US 2012-0129244 A1. The application was converted
to a utility application on October 14, 2011.
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On
October 19, 2010, we filed a provisional patent application with the USPTO to protect the intellectual property rights for
“Methods and Apparatus for Dewatering, Flocculation and Harvesting Algae Cells”. The inventors listed on the patent
application are Michael Green, Nicholas Eckelberry, Scott Fraser, and Brian Goodall. We are listed as the assignee. The application
was converted to a utility application on October 18, 2011. On April 28, 2011, the application was published with the publication
number US 2011-0095225 A1.
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On
October 19, 2010, we filed a PCT application with the Korean Receiving Office to protect the intellectual property rights
for “Systems and Methods for Extracting Non-Polar Lipids from an Aqueous Algae Slurry and Lipids Produced There from”.
The inventors are Nicholas Eckelberry, Michael Green, and Scott Fraser. We are listed as the assignee. On April 28, 2011,
the application published with the publication number WO/2011/133181.
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On
March 18, 2011, we filed a provisional patent application with the USPTO to protect the intellectual property rights for “Enhancing
Algae Growth by Reducing Competing Microorganisms in a Growth Medium”. The inventors listed on the patent application
are Michael Green, Scott Fraser, Nicholas Eckelberry, and Jose Sanchez Pina. We are listed as the assignee.
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On
May 20, 2011, we filed a provisional patent application with the USPTO to protect the intellectual property rights for “Systems
and Methods for Monitoring and Controlling Process Chemistry Associated with Biomass Growth, Oil Product and Oil Separation
in Aqueous Mediums”. The inventors listed on the patent application are Paul Reep and Gavin Grey. We are listed as the
assignee.
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On
June 16, 2011, we filed a utility patent application with the USPTO to protect the intellectual property rights for “Bio-Energy
Reactor”. The inventors listed on the patent application are Michael Green and Nicholas Eckelberry. On April 28, 2011
the application published with the publication number US 2011-0095225 A1. We are listed as the assignee.
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On
August 10, 2011, we filed a utility patent application with the USPTO to protect the intellectual property rights for “Procedure
for Extracting of Lipids from Algae without Cell Sacrifice”. The inventors listed on the patent application are Michael
Green and Paul Reep. We are listed as the assignee.
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On
August 12, 2011, we filed a PCT application with the Korean Receiving Office to protect the intellectual property rights for
“Procedure for Extracting of Lipids from Algae Without Cell Sacrifice”. The inventors listed on the patent application
are Michael Green and Paul Reep. On February 16, 2012 the application published with the publication number WO/2012/021831.
We are listed as the assignee.
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On
September 7, 2011, we filed a provisional patent application with the USPTO to protect the intellectual property rights for
“Apparatuses, Systems and Methods for Increasing Contact Between Solutes and Solvents in an Aqueous Medium”. The
inventors listed on the patent application are Nicholas Eckelberry, Gavin Gray, Jose L Sanchez Pina and Maxwell Roth. We are
listed as the assignee.
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On
October 10, 2011, we filed a provisional patent application with the USPTO to protect the intellectual property rights for
“Systems and Methods For Increasing Growth Of Biomass Feedstocks”. The inventors listed on the patent application
are Nicholas Eckelberry, Jose L Sanchez Pina and Michael Green. We are listed as the assignee.
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On
October 14, 2011, we filed a provisional patent application with the USPTO to protect the intellectual property rights for
“Systems and Methods For Developing Terrestrial and Algal Biomass Feedstocks and Bio-Refining the Same”. The inventor
listed on the patent application was Paul Reep. We are listed as the assignee.
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On
October 14, 2011, we filed a utility patent application with the USPTO to protect the intellectual property rights for “Systems,
Methods And Apparatuses For Dewatering, Flocculating And Harvesting Algae Cells”. The inventors listed on the patent
application are Michael Green, Scott Frasier, Brian Goodall and Nickolas Eckelberry. On May 24, 2012 the application
published with the publication number US 2012/0129244 A1. We are listed as the assignee.
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On
October 18, 2011, we filed a PCT application with the Korean Receiving Office to protect the intellectual property rights
for “Systems, Methods and Apparatuses For Dewatering, Flocculating and Harvesting Algae Cells”. The inventors
listed on the patent application are Michael Green, Scott Frasier, Brian Goodall and Nickolas Eckelberry. On April
26, 2012 the application published with the publication number WO/2012/054404. We are listed as the assignee.
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On
November 11, 2011, we filed a trademark application with the USPTO to protect the intellectual property rights for our company
logo “O”. On February 11, 2013 the trademark was issued with Certificate Number 4,284,801.
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On
November 11, 2011, we filed a trademark application with the USPTO to protect the intellectual property rights for our company
logo “OriginOil”. On February 11, 2013 the trademark was issued with Certificate Number 4,284,800.
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On
January 30, 2012, we filed a provisional patent application with the USPTO to protect the intellectual property rights for
“Systems and Methods for Harvesting and Dewatering Algae”. The inventor listed on the patent application is Nicholas
Eckelberry. We are listed as the assignee.
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On
March 12, 2012, we filed a utility patent application and PCT applications with the Korean Receiving Office to protect the
intellectual property rights for “Enhancing Algae Growth by Reducing Competing Microorganisms in a Growth Medium”.
The inventors listed on the patent application are Michael Green, Scott Fraser, Nicholas Eckelberry, and Jose Sanchez Pina.
We are listed as the assignee. On November 27, 2012, the application published with the publication number WO/2012/129031.
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On
April 17, 2012, we filed a provisional patent application with the USPTO to protect the intellectual property rights for “Solute
Extraction From an Aqueous Medium Using a Modular Device”. The inventor listed on the patent application is Nicholas
Eckelberry. We are listed as the assignee.
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On
May 18, 2012, we filed a provisional patent application with the USPTO to protect the intellectual property rights for “Modular
Systems and Methods for Extracting a Contaminant from a Solution”. The inventor listed on the patent application is
Nicholas Eckelberry. We are listed as the assignee.
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On
May 18, 2012, we filed a utility patent application with the USPTO to protect the intellectual property rights for “Monitoring
Systems for Biomass Processing Systems”. The inventors listed on the patent application are Paul Reep and Gavin Grey.
We are listed as the assignee.
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On
May 21, 2012, we filed a PCT application with the Korean Receiving Office to protect the intellectual property rights for
“Monitoring Systems for Biomass Processing Systems”. The inventors listed on the patent application are Paul Reep
and Gavin Grey. We are listed as the assignee.
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On
September 6, 2012, the Australian Patent Office issued patent 2010239380 titled “Systems, Apparatus and Methods for
Obtaining Intracellular Products and Cellular Mass and Debris from Algae and Derivative Products and Process of Use Thereof”.
This application was nationalized from PCT application PCT/US2010/031756.
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On
September 7, 2012, we filed a utility patent application with the USPTO to protect the intellectual property rights for “Increasing
Contact Between Solutes and Solvents in an Aqueous Medium”. The inventors listed on the patent application are Nicholas
Eckelberry, Gavin Grey, Jose Sanchez Pina, and Maxwell Roth. We are listed as the assignee.
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On
September 9, 2012, we filed a utility patent application with the USPTO to protect the intellectual property rights for “Systems
and Methods for Increasing Growth of Biomass Feedstocks”. The inventors listed on the patent application are Nicholas
Eckelberry, Mike Green, and Jose Sanchez Pina. We are listed as the assignee.
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On
October 10, 2012, we filed a PCT application with the Korean Receiving Office to protect the intellectual property rights
for “Systems and Methods for Increasing Growth of Biomass Feedstocks”. The inventors listed on the patent application
are Nicholas Eckelberry, Mike Green, and Jose Sanchez Pina. We are listed as the assignee.
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On
October 15, 2012, we filed a utility patent application with the USPTO to protect the intellectual property rights for “Systems
and methods for Developing Terrestrial and Algal Biomass Feedstocks and Bio-refining the Same”. The inventor listed
on the patent application is Paul Reep. We are listed as the assignee.
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On
October 18, 2012, we filed a utility patent application with the USPTO to protect the intellectual property rights for “Systems
and methods for Extracting Non-polar Lipids from an Aqueous Algae Slurry and Lipids Produced There from”. The inventors
listed on the patent application are Nicholas Eckelberry, Michael Green and Scott Fraser. We are listed as the assignee.
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On
October 19, 2012, we filed national stage application with the EPO to protect the intellectual property rights for “Systems
and methods for Extracting Non-polar Lipids from an Aqueous Algae Slurry and Lipids Produced There from”. The inventors
listed on the patent application are Nicholas Eckelberry, Michael Green and Scott Fraser. We are listed as the assignee.
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On
January 29, 2013, we filed a utility patent application with the USPTO to protect the intellectual property rights for “Systems
and Methods for Harvesting and Dewatering Algae”. The inventor listed on the patent application is Nicholas Eckelberry.
We are listed as the assignee.
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On
January 30, 2013, we filed a PCT application with the Korean Receiving Office to protect the intellectual property rights
for “Systems and Methods for Harvesting and Dewatering Algae”. The inventor listed on the patent application is
Nicholas Eckelberry. We are listed as the assignee.
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On
April 17, 2013, we filed a patent application with the USPTO to protect the intellectual
property rights for “Harvesting and Dewatering Algae Using a Two-Stage Process”.
The inventors listed on the patent application are Nicholas Eckelberry and Jose L. Sanchez
Pina. We are listed as the assignee.
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On
April 17, 2013, we filed a PCT application with the USPTO to protect the intellectual property rights for “Harvesting
and Dewatering Algae Using a Two-Stage Process”. The inventors listed on the patent application are Nicholas Eckelberry
and Jose L. Sanchez Pina. We are listed as the assignee.
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On
April 26, 2013, we filed a patent application with the USPTO to protect the intellectual property rights for “Producing
Algae Biomass Having Reduced Concentration of Contaminants”. The inventor listed on the patent application is Jose L.
Sanchez Pina. We are listed as the assignee.
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On
July 15, 2013, we filed a patent application with the USPTO to protect the intellectual property rights for “Removing
Ammonia from Water”. The inventors listed on the patent application are Nicholas Eckelberry, Jose L. Sanchez Pina and
Andrew Davies. We are listed as the assignee.
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On
September 9, 2013, we filed a patent application with the EPO, to protect the intellectual property rights for “Removing
Compounds from Water Using a Series of Reactor Tubes Containing Cathodes Comprised of a Mixed Metal Oxide”. The inventors
listed on the patent application are Nicholas Eckelberry, Jose L. Sanchez Pina and Scott Alexander Fraser. We are listed as
the assignee.
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On
December 17, 2013, we filed a patent application with the USPTO to protect the intellectual property rights for “Removing
Compounds from Water Using a Series of Reactor Tubes Containing Cathodes Comprised of a Mixed Metal Oxide”. The inventors
listed on the patent application are Nicholas Eckelberry, and Jose L. Sanchez Pina. We are listed as the assignee.
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On
February 27, 2014, we filed a patent application with the USPTO to protect the intellectual property rights for “Electro
Catalytic Process for Coalescing and Skimming Pollutants in Bodies of Water Prior to Filtration”. The inventor listed
on the patent application is Nicholas Eckelberry. We are listed as the assignee.
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On
April 17, 2014, we filed a PCT application with the USPTO to protect the intellectual
property rights for “Removing Ammonia from Water”. The inventors listed on
the patent application are Nicholas Eckelberry, Jose L. Sanchez Pina and Andrew Davies.
We are listed as the assignee
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On
April 17, 2014, we filed a PCT application with the USPTO, to protect the intellectual property rights for “Removing
Compounds from Water Using a Series of Reactor Tubes Containing Cathodes Comprised of a Mixed Metal Oxide”. The inventors
listed on the patent application are Nicholas Eckelberry and Jose L. Sanchez Pina. We are listed as the assignee.
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On
April 17, 2014, we filed a PCT application with the USPTO to protect the intellectual property rights for “Producing
Algae Biomass Having Reduced Concentration of Contaminants”. The inventors listed on the patent application are Nicholas
Eckelberry and Jose L. Sanchez Pina. We are listed as the assignee.
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On
June 24, 2014, we filed a patent application with the Australian Patent Office to protect the intellectual property rights
for “Systems and Methods for Harvesting and Dewatering Algae”. The inventor listed on the patent application is
Nicholas Eckelberry. We are listed as the assignee.
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On
June 24, 2014, we filed a patent application with the European Patent Office to protect the intellectual property rights for
“Systems and Methods for Harvesting and Dewatering Algae”. The inventor listed on the patent application is Nicholas
Eckelberry. We are listed as the assignee.
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On
July 23, 2014, we filed a patent application with the Chinese Patent Office to protect the intellectual property rights for
“Systems and Methods for Harvesting and Dewatering Algae”. The inventor listed on the patent application is Nicholas
Eckelberry. We are listed as the assignee.
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On
July 25, 2014, we filed a patent application with the Korean Patent Office to protect the intellectual property rights for
“Systems and Methods for Harvesting and Dewatering Algae”. The inventor listed on the patent application is Nicholas
Eckelberry. We are listed as the assignee.
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On
July 28, 2014, we filed a patent application with the Japanese Patent Office to protect the intellectual property rights for
“Systems and Methods for Harvesting and Dewatering Algae”. The inventor listed on the patent application is Nicholas
Eckelberry. We are listed as the assignee.
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On
October 13, 2014, we filed a patent application with the EPO to protect the intellectual
property rights for “Harvesting and Dewatering Algae Using a Two-Stage Process”.
The inventor listed on the patent application is Nicholas Eckelberry. We are listed as
the assignee.
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On
October 15, 2014, we filed a patent application with the Malaysian Patent Office to protect the intellectual property rights
for “Harvesting and Dewatering Algae Using a Two-Stage Process”. The inventor listed on the patent application
is Nicholas Eckelberry. We are listed as the assignee.
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On
October 16, 2014, we filed a patent application with the Japanese Patent Office to protect the intellectual property rights
for “Harvesting and Dewatering Algae Using a Two-Stage Process”. The inventor listed on the patent application
is Nicholas Eckelberry. We are listed as the assignee.
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On
October 16, 2014, we filed a patent application with the Indian Patent Office to protect the intellectual property rights
for “Harvesting and Dewatering Algae Using a Two-Stage Process”. The inventor listed on the patent application
is Nicholas Eckelberry. We are listed as the assignee.
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On
October 17, 2014, we filed a patent application with the Mexican Patent Office to protect the intellectual property rights
for “Harvesting and Dewatering Algae Using a Two-Stage Process”. The inventor listed on the patent application
is Nicholas Eckelberry. We are listed as the assignee.
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On
October 17, 2014, we filed a patent application with the Chinese Patent Office to protect the intellectual property rights
for “Harvesting and Dewatering Algae Using a Two-Stage Process”. The inventor listed on the patent application
is Nicholas Eckelberry. We are listed as the assignee.
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On
November 12, 2014, we filed a patent application with the Korean Patent Office to protect the intellectual property rights
for “Harvesting and Dewatering Algae Using a Two-Stage Process”. The inventor listed on the patent application
is Nicholas Eckelberry. We are listed as the assignee.
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On
November 17, 2014, we filed a utility patent application with the USPTO to protect the intellectual property rights for “System
for removal of suspended solids and disinfection of water”. The inventors listed on the patent application are William
Charneski, Nicholas Eckelberry and Dave Anderson. We are listed as the assignee.
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On
December 11, 2014, we filed a utility patent application with the USPTO to protect the intellectual property rights for “Method
for Treating Wastewater”. The inventors listed on the patent application are Nicholas Eckelberry and Andrew Davies.
We are listed as the assignee.
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On
December 10, 2014, the Chinese Patent Office issued patent ZL201080023861.1 titled “Systems, Apparatus and Method for
Obtaining Intracellular Products and Cellular Mass and Debris from Algae and Derivative Products and Process of Use Thereof”.
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On
December 16, 2014, we filed a CIP application with the USPTO to protect the intellectual property rights for “Systems
and Methods for Treating Wastewater”. The inventors listed on the patent application are Nicholas Eckelberry, William
Charneski and Andrew Davies. We are listed as the assignee.
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On
February 26, 2015, we filed a Utility Patent application with the USPTO to protect the
intellectual property rights for “Electro Catalytic Process for Coalescing and
Skimming Pollutants in Bodies of Water Prior to Filtration”. The inventor listed
on the patent application is Nicholas Eckelberry. This application was published under
the publication number US-20150191366-A1.
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On
February 27, 2015, we filed a PCT application to protect our international priority rights
on intellectual property for “Electro Catalytic Process for Coalescing and Skimming
Pollutants in Bodies of Water Prior to Filtration”. The inventor listed on the
patent application is Nicholas Eckelberry. The publication number is WO 2015-131111.
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On
June 5, 2015, we filed a provisional patent application with the USPTO to protect the
intellectual property rights for “Systems and Methods for Base and Acid Reaction
for Extraction”. The inventor listed on the patent application is Nicholas Eckelberry.
We are listed as the assignee.
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On
July 8, 2015, we filed a CIP application with the USPTO to protect the intellectual property
rights for “Systems and methods for Extracting Non-polar Lipids from an Aqueous
Algae Slurry and Lipids Produced Therefrom”. The inventors listed on the patent
application are Nicholas Eckelberry, Michael Green and Scott Fraser. We are listed as
the assignee.
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On
October 15, 2015, we filed a patent application with the Malaysian patent office to protect
the intellectual property rights for “Producing Algae Biomass Having Reduced Concentration
of Contaminants”. The inventors listed on the patent application are Nicholas Eckelberry
and Jose L. Sanchez Pina. We are listed as the assignee.
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On
October 16, 2015, we filed a patent application with the Japanese patent office to protect
the intellectual property rights for “Producing Algae Biomass Having Reduced Concentration
of Contaminants”. The inventors listed on the patent application are Nicholas Eckelberry
and Jose L. Sanchez Pina. We are listed as the assignee.
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On
October 19, 2015, we filed a patent application with the Chinese patent office to protect
the intellectual property rights for “Producing Algae Biomass Having Reduced Concentration
of Contaminants”. The inventors listed on the patent application are Nicholas Eckelberry
and Jose L. Sanchez Pina. We are listed as the assignee.
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On
October 20, 2015, we filed a patent application with the EPO to protect the intellectual
property rights for “Producing Algae Biomass Having Reduced Concentration of Contaminants”.
The inventors listed on the patent application are Nicholas Eckelberry and Jose L. Sanchez
Pina. We are listed as the assignee.
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On
October 20, 2015, we filed a patent application with the Australian patent office to
protect the intellectual property rights for “Harvesting and Dewatering Algae Using
a Two-Stage Process”. The inventors listed on the patent application are Nicholas
Eckelberry and Jose L. Sanchez Pina. We are listed as the assignee.
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On
November 12, 2015, we filed a patent application with the Korean patent office to protect
the intellectual property rights for “Producing Algae Biomass Having Reduced Concentration
of Contaminants”. The inventors listed on the patent application are Nicholas Eckelberry
and Jose L. Sanchez Pina. We are listed as the assignee.
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On
November 13, 2015, we filed a patent application with the Indonesian patent office to
protect the intellectual property rights for “Producing Algae Biomass Having Reduced
Concentration of Contaminants”. The inventors listed on the patent application
are Nicholas Eckelberry and Jose L. Sanchez Pina. We are listed as the assignee.
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On
November 17, 2015, we filed a PCT application to protect our international priority rights
on the intellectual property for “Systems for Removal of Suspended Solids and Disinfection
of Water”. The inventors listed on the patent application are Nicholas Eckelberry,
William Charneski and Dave Anderson. We are listed as the assignee.
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On
November 17, 2015, we filed a patent application with the Indian patent office to protect
the intellectual property rights for “Producing Algae Biomass Having Reduced Concentration
of Contaminants”. The inventors listed on the patent application are Nicholas Eckelberry
and Jose L. Sanchez Pina. We are listed as the assignee.
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On
December 10, 2015, we filed a PCT application to protect our international priority rights
on the intellectual property for “Systems and Methods for Treating Wastewater”.
The inventors listed on the patent application are Nicholas Eckelberry, William Charneski
and Andrew Davies. We are listed as the assignee.
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On
January 5, 2016, we filed a provisional patent application with the USPTO to protect
our intellectual property rights for “Systems and methods for reduction of total
organic compounds in wastewater”. The inventor listed on the patent application
is Nicholas Eckelberry. We are listed as the assignee.
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On
March 10, 2016, we filed a patent application with the Hong Kong patent office to protect
our intellectual property rights for “Producing Algae Biomass and Decontaminating
Wastewater Utilizing a Series of Reactor Tubes with Mixed Metal Oxide Electrodes”.
The inventors listed on the patent application are Nicholas Eckelberry and Jose Luis
Sanchez Pina. We are listed as the assignee.
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On
May 13, 2016, the Japanese Patent Office issued patent No. 5931220 titled “Systems
and Methods for Harvesting and Dewatering Algae”. This application was nationalized
from PCT application WO/2013/116357.
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On
June 2, 2016, we filed a Utility Patent application with the USPTO to protect our intellectual
property rights for “Systems and methods for reduction of total organic compounds
in wastewater”. The inventor listed on the patent application is Nicholas Eckelberry.
We are listed as the assignee.
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On
June 3, 2016, we filed a PCT application to protect our international priority rights
on the intellectual property for “Systems and methods for reduction of total organic
compounds in wastewater”. The inventor listed on the patent application is Nicholas
Eckelberry. We are listed as the assignee.
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In
2008, we abandoned the pursuit of two provisional patent filings filed in relating to “In-Line Lysing And Extraction System
for Microorganisms” and “Renewable Carbon Sequestering Method of Producing Pollution Free Electricity”.
In
2009, we abandoned the pursuit of a provisional patent related to “Modular Portable Photobioreactor System”.
In
2010, we abandoned the pursuit of utility patent application related to “Device and Method for Separation, Cell Lysing and
Flocculation of Algae from Water” and provisional patent application “Methods and Apparatus for Growing Algae on a
Solid Surface”.
In
2011, we abandoned the pursuit of provisional patent application related to “Algae Growth Lighting and Control System”.
In
2012, we abandoned the pursuit of provisional patent filings related to “Multi-Plane Growth Apparatus and Method”,
“Systems and Methods for Monitoring and Controlling Algae Growth and Harvesting Cellular Mass and Intracellular Products”,
“Method for Extracting Intracellular Products from Microorganisms Using Gas Embolism”, “Algae Harvest Appliance”,
“A System, Method And Apparatus To Produce Dewatered And Densified Algae Biomass” and foreign rights for “Bio-Energy
Reactor”.
In
2013, we transferred the rights to the patents related to "Bio Energy Reactor", "Algae Growth System for Oil Production"
and "Apparatus and Method for Optimizing Photosynthetic Growth in a Photo Bioreactor" to our partner Ennesys in France.
In
2015, we abandoned the pursuit of Australian patent application for “Systems and Methods for Harvesting and Dewatering Algae”.
In
2016, we abandoned the pursuit of provisional patent filings related to “Systems, Methods and Apparatuses for Dewatering,
Flocculating and Harvesting Algae Cells”, “Monitoring Systems for Biomass Processing Systems”, “Increasing
Contact Between Solutes and Solvents in an Aqueous Medium”, “Systems and Methods for Increasing Growth of Biomass
Feedstocks”, and “Harvesting and Dewatering Algae Using a Two-Stage Process”.
None of these abandoned
or transferred patents are required for our business or products and we are focusing our efforts on the patent applications listed
above.
Research
and Development
During
the years ended December 31, 2016 and 2015, we invested $502,209 and $814,014, respectively, on research and development of our
technologies. Research and development costs include activities related to development and innovations in the core Electro
Water Separation™ (EWS) technology, fabrication and scale-up of products based on this technology, development of firmware
and process automation, development of new applications in industries such as aquaculture, technical support of customers, agents,
joint venture partners and licensees, on-site consulting and training activities, and miscellaneous research.
In
one outcome of this investment, OriginClear enhanced its Electro Water Separation technology by pairing it with Advanced Oxidation,
for which we filed a patent in the 2
nd
Quarter of 2016.
OriginClear’s
Advanced Oxidation is a patent-pending, chemical-free way to extract dissolved contaminants, such as bacteria, ammonia, pharmaceuticals
and solvents. This complements the EWS technology, which effectively clarifies very dirty, oily water so that membranes and filters
can do their job without clogging.
Employees
As
of March 31, 2017, we have 26 full-time employees. We have not experienced any work stoppages and we consider relations
with our employees to be good.
ITEM
1A. RISK FACTORS
Risks
Relating to Our Business
We
have a limited operating history which makes it difficult to evaluate our business and prospects.
We
were formed in June 2007 and are currently developing a new technology that has not yet gained market acceptance. As such, we
have a limited operating history upon which you can base an evaluation of our business and prospects. Since we have not been profitable,
there are substantial risks, uncertainties, expenses and difficulties that we are subject to. To address these risks and uncertainties,
we must do among the following:
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Successfully
execute our business strategy;
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Respond
to competitive developments; and
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Attract,
integrate, retain and motivate qualified personnel;
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There
can be no assurance that at this time we will operate profitably or that we will have adequate working capital to meet our obligations
as they become due. Investors must consider the risks and difficulties frequently encountered by early stage companies, particularly
in rapidly evolving markets. We cannot be certain that our business strategy will be successful or that we will successfully address
these risks. In the event that we do not successfully address these risks, our business, prospects, financial condition, and results
of operations could be materially and adversely affected.
We
have a history of losses and can provide no assurance of our future operating results.
We
currently have limited product revenues, and may not succeed in commercializing any products which will generate product or licensing
revenues. Until recently, our primary activity has been research and development. We have experienced net losses and negative
cash flows from operating activities since inception and we expect such losses and negative cash flows to continue in the foreseeable
future. As of December 31, 2016 and 2015, we had working capital (deficit) of $(11,056,570) and $(13,471,476), respectively, and
shareholders' (deficit) of $(11,798,579) and $(12,753,117), respectively. For the years ended December 31, 2016
and 2015, we incurred net losses of $(4,145,830) and $(11,615,066). As of December 31, 2016, we had an aggregate accumulated
deficit of $63,229,607. We may never achieve profitability. The opinion of our independent registered public
accountants on our audited financial statements as of and for the year ended December 31, 2016 contains an explanatory paragraph
regarding substantial doubt about our ability to continue as a going concern. Our ability to continue as a going concern
is dependent upon raising capital from financing transactions and future sales.
We
will need significant additional capital, which we may be unable to obtain.
Revenues
generated from our operations are not presently sufficient to sustain our operations. Therefore, we will need to raise additional
capital to continue our operations. There can be no assurance that additional funds will be available when needed from any source
or, if available, will be available on terms that are acceptable to us. We may be required to pursue sources of additional capital
through various means, including debt or equity financings. Future financings through equity investments are likely to be dilutive
to existing stockholders. Also, the terms of securities we may issue in future capital transactions may be more favorable for
new investors. Newly issued securities may include preferences, superior voting rights, the issuance of warrants or other derivative
securities, and the issuances of incentive awards under equity employee incentive plans, which may have additional dilutive effects.
Further, we may incur substantial costs in pursuing future capital and/or financing, including investment banking fees, legal
fees, accounting fees, printing and distribution expenses and other costs. We may also be required to recognize non-cash expenses
in connection with certain securities we may issue, such as convertible notes and warrants, which will adversely impact our financial
condition. Our ability to obtain needed financing may be impaired by such factors as the capital markets and our history of losses,
which could impact the availability or cost of future financings. If the amount of capital we are able to raise from financing
activities, together with our revenues from operations, is not sufficient to satisfy our capital needs, even to the extent that
we reduce our operations accordingly, we may be required to cease operations.
We
have incurred substantial indebtedness.
As
of March 30, 2017, we have convertible notes with outstanding principal and accrued but unpaid interest of approximately $4,663,477.
All such debt is payable within the following twelve to forty eight months and is convertible at a significant discount to our
market price of stock. Our level of indebtedness and insufficient cash on hand increases the possibility that we may be unable
to generate cash sufficient to pay, when due, the principal of, interest on or other amounts due in respect of the indebtedness.
Our indebtedness, combined with other financial obligations and contractual commitments, could:
·in
the case of convertible debt that is converted into equity, result in a reduction in the overall percentage holdings of our
stockholders, put downward pressure on the market price of our common stock, result in adjustments to conversion and exercise
prices of outstanding notes and warrants and obligate us to issue additional shares of common stock to certain of our stockholders;
·make
it more difficult for us to satisfy our obligations with respect to the indebtedness and any failure to comply with the obligations
under any of our debt instruments, including restrictive covenants, could result in events of default under the loan agreements
and instruments governing the indebtedness;
·require
us to dedicate a substantial portion of our cash flow from operations to payments on indebtedness, thereby reducing
funds available for working capital, capital expenditures, acquisitions, research and development and other corporate purposes;
·increase
our vulnerability to adverse economic and industry conditions, which could place us at a competitive disadvantage compared to
competitors that have relatively less indebtedness;
·limit
our flexibility in planning for, or reacting to, changes in business and the industry in which we operate; and
·limit
our ability to borrow additional funds, or to dispose of assets to raise funds, if needed, for working capital, capital expenditures,
acquisitions, research and development and other corporate purposes.
We
may incur significant additional indebtedness in the future. If we incur a substantial amount of additional indebtedness, the
related risks that we face could become more significant. Additionally, the terms of any future debt that we may incur may impose
requirements or restrictions that further affect our financial and operating flexibility or subject us to other events of default.
Our
revenues are dependent upon acceptance of our technology and products by the market; the failure of which would cause us to curtail
or cease operations.
We
believe that most of our future revenues will come from the sale or license of our technology and systems. As a result, we
will continue to incur substantial operating losses until such time as we are able to generate revenues from the sale or license
of our technology and systems. There can be no assurance that businesses and prospective customers will adopt our technology and
systems, or that businesses and prospective customers will agree to pay for or license our technology and systems. In the event
that we are not able to develop a customer base that purchases or licenses our technology and systems, or if we are unable to
charge the necessary prices or license fees, our financial condition and results of operations will be materially and adversely
affected.
We
will need to increase the size of our organization, and may experience difficulties in managing growth.
We
are a small company with a minimal number of employees. With the start of our planned principal activities, we expect
to experience a period of significant expansion in headcount, facilities, infrastructure and overhead and anticipate that further
expansion will be required to address potential growth and market opportunities. Future growth will impose significant added responsibilities
on members of management, including the need to identify, recruit, maintain and integrate managers. Our future financial performance
and our ability to compete effectively will depend, in part, on our ability to manage any future growth effectively.
We
may not be able to successfully develop and commercialize our technology and systems which would result in continued losses and
may require us to curtail or cease operations.
We
are currently commercializing our technology. We are unable to project when we will achieve profitability, if at all. As is the
case with any new technology, we expect the research and development process to continue. We cannot assure that our engineering
resources will be able to develop our technology and systems fast enough to meet market requirements. We can also not assure
that our technology and systems will gain market acceptance and that we will be able to successfully commercialize the technologies.
The failure to successfully develop and commercialize the technologies would result in continued losses and may require us to
curtail or cease operations.
Our
ability to produce and distribute commercially viable bio-fuel, clean-up oil and gas and waste water and aqua-feed on a commercially
viable basis is unproven, which could have a detrimental effect on our ability to generate or sustain revenues.
The
technologies we use to harvest algae, clean up oil and gas water, and waste water, have never been utilized on a full-scale commercial
basis. Our Electro Water Separation (EWS) technology was only recently developed. All of the tests conducted to date by us with
respect to the technology have been performed in a limited scale or small commercial scale environment and the same or similar
results may not be obtainable at competitive costs on a large-scale commercial basis. We have never employed our technology under
the conditions or in the volumes that will be required for us to be profitable and cannot predict all of the difficulties that
may arise. Accordingly, our technology may not perform successfully on a commercial basis and may never generate any revenues
or be profitable.
If
a competitor were to achieve a technological breakthrough, our operations and business could be negatively impacted.
There
currently exist a number of businesses that are pursuing novel processes to harvest algae, clean up oil and gas water, and waste
water. Should a competitor achieve a research and development, technological or biological breakthrough where process costs are
significantly reduced, efficiency greatly increased over ours, or if the costs of similar competing products were to fall substantially,
we may have difficulty attracting customer licensees or sales. In addition, competition from other technologies considered “green”
(environmental) or “blue” (water technology) could lessen the demand for the end-products produced by our technology.
Furthermore, competitors may have access to larger resources (capital or otherwise) that provide them with an advantage in the
marketplace, which could result in a negative impact on our business.
Any
competing technology that harvests algae, cleans up oil and gas water, and waste water, at a superior scale and more cost efficient
than ours, could render our technology obsolete. In addition, because we do not have any issued patents for all but one of our
patent applications, we may not be able to preclude development of even directly competing technologies using the same methods,
materials and procedures as we use to achieve our results. Any of these competitive forces may inhibit or materially adversely
affect our ability to attract customer licensees, or to obtain royalties or other fees from our customer licensees. This could
have a material adverse effect on our business, prospects, results of operation and financial condition.
Our
long-term success depends on future royalties paid to us by licensees, and we face the risks inherent in a royalty-based business
model.
We
intend to generate revenue through the licensing of our technology and systems, and our long-term success depends on future royalties
paid to us by prospective customer licensees. The amount of royalty payments we may receive is expected to be based upon the revenues
generated by our prospective customer licensees’ operations, and so we will be dependent on the successful operations of
our prospective customer licensees for a significant portion of our revenues. We face risks inherent in a royalty-based business
model, many of which are outside of our control, including those arising from our reliance on the management and operating capabilities
of our customer licensees and the cyclicality of supply and demand for end-products produced using our technology. Should our
prospective customer licensees fail to achieve sufficient profitability in their operations, our royalty payments would be diminished
and our results of operations, cash flows and financial condition could be adversely affected, and any such effects could be material.
We
rely on strategic partners.
We
rely on strategic partners to aid in the development and marketing of our technology and processes. Should our strategic partners
not regard us as significant to their own businesses, they could reduce their commitment to us or terminate their relationship
with us, pursue competing relationships or attempt to develop or acquire processes that compete with ours. Any such action could
materially adversely affect our business.
A
lack of government subsidies may hinder the usefulness of our technology.
While
our long-term business model is based on licensing our technology to original equipment manufacturers (OEMs), distributors, resellers,
service providers and other licensees, we also assemble and sell complete solutions based on EWS. Subsidies of any of the industries
vary and may be reduced or eliminated, which could have a material adverse effect on our business. Likewise, regulations may become
more onerous which also could have a material adverse effect on our business.
The
industries in which we operate may endure deflationary cycles, affecting our ability to sell and license our systems.
If
the current low cost of crude persists, it may become difficult or impossible to sell or license systems to the oil and gas industry,
and the field of biofuels may become economically unviable. Such events and other deflationary events may impact our business
materially.
If
we lose key employees and consultants or are unable to attract or retain qualified personnel, our business could suffer.
Our
success is highly dependent on our ability to attract and retain qualified scientific, engineering and management personnel. We
are highly dependent on our management, including T. Riggs Eckelberry, who has been critical to the development of our technology
and business. The loss of the services of Mr. Eckelberry would have a material adverse effect on our operations. We do not have
an employment agreement with Mr. Eckelberry. Accordingly, there can be no assurance that he will remain associated with us. His
efforts will be critical to us as we continue to develop our technology and as we attempt to transition to a company with profitable
company commercialized products and services. If we were to lose Mr. Eckelberry, or any other key employees or consultants, we
may experience difficulties in competing effectively, developing our technology and implementing our business strategies.
Competition
from other companies in our market may affect the market for our technology.
New
companies are constantly entering the market, thus increasing the competition. This could also have a negative impact on us or
our customers’ ability to obtain additional capital from investors. Larger foreign owned and domestic companies which have
been engaged in water cleanup and algae harvesting for substantially longer periods of time may have access to greater financial
and other resources. These companies may have greater success in the recruitment and retention of qualified employees, as well
as in conducting their own fuel manufacturing and marketing operations, which may give them a competitive advantage. In addition,
actual or potential competitors may be strengthened through the acquisition of additional assets and interests. If we or our customers
are unable to compete effectively or adequately respond to competitive pressures, this may materially adversely affect our results
of operation and financial condition.
Risks
Related to Our Intellectual Property
If
we fail to establish, maintain and enforce intellectual property rights with respect to our technology, our financial condition,
results of operations and business could be negatively impacted.
Our
ability to establish, maintain and enforce intellectual property rights with respect to the technology that we intend to license
will be a significant factor in determining our future financial and operating performance. We seek to protect our intellectual
property rights by relying on a combination of patent, trade secret and copyright laws. We also use confidentiality and other
provisions in our agreements that restrict access to and disclosure of our confidential know-how and trade secrets.
We
have filed patent applications with respect to many aspects of our technologies. However, we cannot provide any assurances
that any of these applications will ultimately result in issued patents or, if patents are issued, that they will provide sufficient
protections for our technology against competitors. Although we have filed various patent applications for some of our core technologies,
we currently hold only five issued patents, one each in in the United States, Australia, Japan, China and Mexico and we may face
delays and difficulties in obtaining our other filed patents, or we may not be able to obtain such patents at all.
Outside
of these patent applications, we seek to protect our technology as trade secrets and technical know-how. However, trade secrets
and technical know-how are difficult to maintain and do not provide the same legal protections provided by patents. In particular,
only patents will allow us to prohibit others from using independently developed technology that are similar. If competitors develop
knowledge substantially equivalent or superior to our trade secrets and technical know-how, or gain access to our knowledge through
other means such as observation of our technology that embodies trade secrets at customer sites which we do not control, the value
of our trade secrets and technical know-how would be diminished.
While
we strive to maintain systems and procedures to protect the confidentiality and security of our trade secrets and technical know-how,
these systems and procedures may fail to provide an adequate degree of protection. For example, although we generally enter into
agreements with our employees, consultants, advisors, and strategic partners restricting the disclosure and use of trade
secrets, technical know-how and confidential information, we cannot provide any assurance that these agreements will be sufficient
to prevent unauthorized use or disclosure. In addition, some of the technology deployed at customer sites in the future, which
we do not control, may be readily observable by third parties who are not under contractual obligations of non-disclosure, which
may limit or compromise our ability to continue to protect such technology as a trade secret.
Monitoring
and policing unauthorized use and disclosure of intellectual property is difficult. If we learned that a third party was in fact
infringing or otherwise violating our intellectual property, we may need to enforce our intellectual property rights through
litigation. Litigation relating to our intellectual property may not prove successful and might result in substantial costs and
diversion of resources and management attention.
From
our customer licensee’s standpoint, the strength of the intellectual property under which we intend to grant licenses can
be a critical determinant of the value of these licenses. If we are unable to secure, protect and enforce our intellectual property,
it may become more difficult for us to attract new customers. Any such development could have a material adverse effect
on our business, prospects, financial condition and results of operations.
Although
we have filed various patent applications for some of our core technologies, we currently hold only five issued patents, one each
in the United States, Australia, Japan, China and Mexico, and we may face delays and difficulties in obtaining other filed patents,
or we may not be able to obtain such patents at all.
Patents
are a key element of our intellectual property strategy. We have over thirty currently pending patent applications in the
United States and abroad but, to date, other than the five issued patents, no patents have been issued from these other applications.
It may take a long time for any patents to issue from the applications, and we cannot provide any assurance that any patents will
ultimately be issued or that any patents that do ultimately issue will issue in a form that will adequately protect our commercial
advantage.
Our
ability to obtain patent protection for our technologies is uncertain due to a number of factors, including that we may not have
been the first to make the inventions covered by our pending patent applications or to file patent applications for these inventions.
Further,
changes in U.S. and foreign patent law may also impact our ability to successfully prosecute our patent applications. For
example, the United States Congress and other foreign legislative bodies may amend their respective patent laws in a manner that
makes obtaining patents more difficult or costly. Courts may also render decisions that alter the application of patent laws and
detrimentally affect our ability to obtain patent protection.
Even
if patents do ultimately issue from our patent applications, these patents may not provide meaningful protection or commercial
advantage. In the US, patents only provide protection for a 20-year period starting from the filing date and the longer a patent
application takes to issue the less time there is to enforce it. Further, the claims under any patents that issue from our applications
may not be broad enough to prevent others from developing technologies that are similar or that achieve similar results. It is
also possible that the intellectual property rights of others will bar us from licensing our technology and bar us or our future
licensees from exploiting any patents that issue from our pending applications. Numerous U.S. and foreign issued patents and pending
patent applications owned by others exist in the fields in which we have developed and are developing our technology. These
patents and patent applications might have priority over our patent applications and could subject our patent applications
to invalidation. Finally, in addition to those who may claim priority, any patents that issue from our applications may also be
challenged by our competitors on the basis that they are otherwise invalid or unenforceable.
We
may face claims that we are violating the intellectual property rights of others.
We
may face claims, including from direct competitors, other energy companies, scientists or research universities, asserting that
our technology or the commercial use of such technology infringes or otherwise violates the intellectual property rights of others.
We have not conducted infringement, freedom to operate or landscape analyses, and as a result we cannot be certain that our technologies
and processes do not violate the intellectual property rights of others. We expect that we may increasingly be subject to such
claims as we begin to earn revenues and our market profile grows.
We
may also face infringement claims from the employees, consultants, agents and outside organizations we have engaged to develop our
technology. While we have sought to protect ourselves against such claims through contractual means, we cannot provide any assurance
that such contractual provisions are adequate, and any of these parties might claim full or partial ownership of the intellectual
property in the technology that they were engaged to develop.
If
we were found to be infringing or otherwise violating the intellectual property rights of others, we could face significant costs
to implement work-around methods, and we cannot provide any assurance that any such work-around would be available or technically
equivalent to our current technology. In such cases, we might need to license a third party’s intellectual property, although
any required license might not be available on acceptable terms, or at all. If we are unable to work around such infringement
or obtain a license on acceptable terms, we might face substantial monetary judgments against us or an injunction against continuing
to license our technology, which might cause us to cease operations.
In
addition, even if we are not infringing or otherwise violating the intellectual property rights of others, we could nonetheless
incur substantial costs in defending ourselves in suits brought against us for alleged infringement. Also, if any license agreements
provide that we will defend and indemnify our customer licensees for claims against them relating to any alleged infringement
of the intellectual property rights of third parties in connection with such customer licensees’ use of our technologies,
we may incur substantial costs defending and indemnifying any customer licensees to the extent they are subject to these types
of claims. Such suits, even if without merit, would likely require our management team to dedicate substantial time to addressing
the issues presented. Any party bringing claims might have greater resources than we do, which could potentially lead to us settling
claims against which we might otherwise prevail on the merits.
Any
claims brought against us or any customer licensees alleging that we have violated the intellectual property of others could have
negative consequences for our financial condition, results of operations and business, each of which could be materially adversely
affected as a result.
Risks
Related to Our Common Stock
Our
common stock could be further diluted as the result of the issuance of additional shares of common stock, convertible securities,
warrants or options.
In
the past, we have issued common stock, convertible securities (such as convertible debentures and notes) and warrants in order
to raise money, some of which have anti-dilution and other similar protections. We have also issued options and warrants as compensation
for services and incentive compensation for our employees and directors. We have shares of common stock reserved for issuance
upon the exercise of certain of these securities and may increase the shares reserved for these purposes in the future. Our issuance
of additional common stock, convertible securities, options and warrants could affect the rights of our stockholders, result in
a reduction in the overall percentage holdings of our stockholders, could put downward pressure on the market price of our common
stock, could result in adjustments to conversion and exercise prices of outstanding notes and warrants, and could obligate us
to issue additional shares of common stock to certain of our stockholders.
There
may be a limited public market for our securities.
Trading
in our common stock continues to be conducted on the electronic bulletin board in the over-the-counter market. As a result, an
investor may find it difficult to dispose of or to obtain accurate quotations as to the market value of our common stock, and
our common stock may be less attractive for margin loans, for investment by financial institutions, as consideration in future
capital raising transactions or other purposes.
Additionally,
on November 1, 2016, the Company received a notice from the OTCQB Marketplace (the “OTCQB”) advising the Company that
its bid price has closed below $0.01 for more than 30 consecutive calendar days and no longer meets the Standards for Continued
Eligibility for OTCQB as per the OTCQB standards. Pursuant to the OTCQB standards, the Company has been granted a period
of 180 calendar days in which to regain compliance with Section 2.3, or until April 30, 2017. If, at that time, the Company’s
bid price has not closed at or above $0.01 for any ten consecutive trading days then the security will be removed from the OTCQB
marketplace and as result it may be difficult to trade in our common stock .
The
price of our common stock is volatile, which may cause investment losses for our stockholders.
The
market for our common stock is highly volatile, having ranged during the fiscal year ended December 31, 2016 from a low of $0.0048
to a high of $0.03 on the OTCQB. The trading price of our common stock on the OTCBB is subject to wide fluctuations in response
to, among other things, quarterly variations in operating and financial results, and general economic and market conditions. In
addition, statements or changes in opinions, ratings, or earnings estimates made by brokerage firms or industry analysts relating
to our market or relating to us could result in an immediate and adverse effect on the market price of our common stock. The highly
volatile nature of our stock price may cause investment losses for our shareholders. In the past, securities class action litigation
has often been brought against companies following periods of volatility in the market price of their securities. If securities
class action litigation is brought against us, such litigation could result in substantial costs while diverting management’s
attention and resources.
Shares
eligible for future sale may adversely affect the market.
From
time to time, certain of our stockholders may be eligible to sell all or some of their shares of common stock by means of ordinary
brokerage transactions in the open market pursuant to Rule 144 promulgated under the Securities Act, subject to certain limitations.
In general, pursuant to Rule 144, non-affiliate stockholders may sell freely after six months subject only to the current public
information requirement. Affiliates may sell after six months subject to the Rule 144 volume, manner of sale (for equity securities),
current public information and notice requirements. As of March 30, 2017, Mr. Eckelberry, our Chief Executive Officer
and Chairman, beneficially owns 60,759,645 shares of our common stock (including 60,000,000 shares of our common stock issuable
upon the exercise of stock options at a price of $0.0375 per share)
.
Any substantial sales of our common stock pursuant
to Rule 144 may have a material adverse effect on the market price of our common stock.
Our
stock is subject to the penny stock rules, which impose significant restrictions on broker-dealers and may affect the resale of
our stock.
Our
common stock has been subject to the provisions of Section 15(g) and Rule 15g-9 of the Securities Exchange Act of 1934, as amended
(the “Exchange Act”), commonly referred to as the “penny stock” rule. Section 15(g) sets forth certain
requirements for transactions in penny stocks and Rule 15g-9(d)(1) incorporates the definition of penny stock as that used in
Rule 3a51-1 of the Exchange Act. The SEC generally defines penny stock to be any equity security that has a market price less
than US$5.00 per share, subject to certain exceptions. Rule 3a51-1 provides that any equity security is considered to be penny
stock unless that security is: registered and traded on a national securities exchange meeting specified criteria set by the SEC;
issued by a registered investment company; excluded from the definition on the basis of price (at least US$5.00 per share) or
the registrant’s net tangible assets; or exempted from the definition by the Commission. Our common stock is considered
to be a “penny stock.” The SEC has adopted rules that regulate broker-dealer practices in connection with transactions
in “penny stocks.” As our common stock is considered to be “penny stock,” trading in our common stock
will be subject to additional sales practice requirements on broker-dealers who sell penny stock to persons other than established
customers and accredited investors. This may reduce the liquidity and trading volume of our shares.
Financial
Industry Regulatory Authority, Inc. (“FINRA”) sales practice requirements may limit a shareholder’s ability
to buy and sell our common shares.
In
addition to the “penny stock” rules described above, FINRA has adopted rules that require that in recommending an
investment to a customer, a broker-dealer must have reasonable grounds for believing that the investment is suitable for that
customer. Prior to recommending speculative low priced securities to their non-institutional customers, broker-dealers must make
reasonable efforts to obtain information about the customer’s financial status, tax status, investment objectives and other
information. Under interpretations of these rules, FINRA believes that there is a high probability that speculative low priced
securities will not be suitable for at least some customers. FINRA requirements make it more difficult for broker-dealers to recommend
that their customers buy our common stock, which may limit your ability to buy and sell our stock and have an adverse effect on
the market for our shares.
We failed to maintain effective
internal controls over financial reporting and as such the price of our common stock may be adversely affected.
We
are required to establish and maintain appropriate internal controls over financial reporting. During the year ended December 31,
2016, we carried out an evaluation, under the supervision and with the participation of our management, including the principal
executive officer and the principal financial officer, of the effectiveness of the design and operation of our disclosure controls
and procedures. Based on that evaluation and due to the lack of segregation of duties partly due to small Company staff size, our
principal executive officer and principal financial officer concluded that our disclosure controls and procedures were ineffective
as of the end of the period covered by this report. Failure to establish those controls, or any failure of those controls once
established, could adversely affect our public disclosures regarding our business, prospects, financial condition or results of
operations. In addition, management’s assessment of internal controls over financial reporting may identify weaknesses and
conditions that need to be addressed in our internal controls over financial reporting or other matters that may raise concerns
for investors. Any actual or perceived weaknesses and conditions that need to be addressed in our internal control over financial
reporting or disclosure of management’s assessment of our internal controls over financial reporting may have an adverse
impact on the price of our common stock.
We
are required to comply with certain provisions of Section 404 of the Sarbanes-Oxley Act of 2002 and if we fail to comply in a
timely manner, our business could be harmed and our stock price could decline.
Rules
adopted by the SEC pursuant to Section 404 of the Sarbanes-Oxley Act of 2002 require an annual assessment of internal controls
over financial reporting, and for certain issuers an attestation of this assessment by the issuer’s independent registered
public accounting firm. The standards that must be met for management to assess the internal controls over financial reporting
as effective are evolving and complex, and require significant documentation, testing, and possible remediation to meet the detailed
standards. We expect to incur significant expenses and to devote resources to Section 404 compliance on an ongoing basis.
It is difficult for us to predict how long it will take or costly it will be to complete the assessment of the effectiveness of
our internal control over financial reporting for each year and to remediate any deficiencies in our internal control over financial
reporting. As a result, we may not be able to complete the assessment and remediation process on a timely basis. In addition,
although attestation requirements by our independent registered public accounting firm are not presently applicable to us we could
become subject to these requirements in the future and we may encounter problems or delays in completing the implementation of
any resulting changes to internal controls over financial reporting. In the event that our Chief Executive Officer or Chief
Financial Officer determine that our internal control over financial reporting is not effective as defined under Section 404,
we cannot predict how regulators will react or how the market prices of our shares will be affected; however, we believe that
there is a risk that investor confidence and share value may be negatively affected.
We
do not intend to pay dividends.
We
do not anticipate paying cash dividends on our common stock in the foreseeable future. We may not have sufficient funds to legally
pay dividends. Even if funds are legally available to pay dividends, we may nevertheless decide in our sole discretion not to
pay dividends. The declaration, payment and amount of any future dividends will be made at the discretion of our board of directors,
and will depend upon, among other things, the results of our operations, cash flows and financial condition, operating and capital
requirements, and other factors our board of directors may consider relevant. There is no assurance that we will pay any dividends
in the future, and, if dividends are paid, there is no assurance with respect to the amount of any such dividend.
ITEM
1B. UNRESOLVED STAFF COMMENTS.
Not
applicable.
ITEM
2. PROPERTIES.
Our principal offices are located at 525 S.
Hewitt Street, Los Angeles, California 90013. We rent a portion of a 30,000 square foot corporate building at a current monthly
rent of $3,750. PWT, our Dallas based subsidiary, rents approximately a 12,000 square foot facility at 2535 E. University Drive,
McKinney, TX 75069, with a current monthly rent of $4,850.
ITEM
3. LEGAL PROCEEDINGS.
From
time to time we may be a defendant and plaintiff in various legal proceedings arising in the normal course of our business. We
are currently not a party to any pending legal proceeding, nor is our property the subject of a pending legal proceeding, that
is not in the ordinary course of business or otherwise material to the financial condition of our business. None of our directors,
officers or affiliates is involved in a proceeding adverse to our business or has a material interest adverse to our business.
ITEM
4. MINE SAFETY DISCLOSURES.
Not
applicable.
The accompanying notes are an integral part of these audited consolidated financial statements
The accompanying notes are an integral part of these audited consolidated financial statements
The accompany notes are
an integral part of these audited consolidated financial statements
The accompanying notes
are an integral part of these audited consolidated financial statements
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER
31, 2016 AND 2015
1. ORGANIZATION
AND LINE OF BUSINESS
Organization
OriginClear,
Inc. (the "Company") was incorporated in the state of Nevada on June 1, 2007. The Company, based in Los Angeles, California,
began operations on June 1, 2007 to develop and market a renewable oil technology. The Company began its’ planned principle
operations in December, 2010, at which time it exited the development stage.
In
December 2014, the Company formed a wholly owned subsidiary, OriginClear (HK) Company Limited (“OCHK”), formerly OriginOil
(HK) Limited, in Hong Kong, China. The Company granted OCHK a master license for the People’s Republic of China. In turn,
OCHK is expected to license regional joint ventures for frack and waste treatment. A research and manufacturing center is also
planned. As of December 31, 2016, OCHK has limited assets and operations.
On
October 1, 2015, the Company completed the acquisition of 100% of the total issued and outstanding stock of Progressive Water
Treatment, Inc. (“PWT”) and is included in these consolidated financial statements as a wholly owned subsidiary. See
Note 3.
Line
of Business
OriginClear
is a leading provider of water treatment solutions and the developer of a breakthrough water cleanup technology. The Company’s
technology integrates easily with other industry processes and can be embedded into larger systems through licensing and
joint ventures. Through the acquisition of Progressive Water Treatment Inc., the Company is primarily engaged in providing water
treatment systems and services for a wide variety of applications and component sales.
Going
Concern
The
accompanying 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
financial statements do not reflect any adjustments that might result if the Company is unable to continue as a going concern. During
the year ended December 31, 2016, the Company did not generate significant revenue, incurred a net loss of $4,145,830 and used
cash in operations of $1,599,513. As of December 31, 2016, the Company had a working capital deficiency of $11,056,570 and
a shareholders’ deficit of $11,798,579. These factors, among others raise substantial doubt about the Company’s
ability to continue as a going concern. Our independent auditors, in their report on our audited financial statements
for the year ended December 31, 2016 expressed substantial doubt about our ability to continue as a going concern.
The accompanying consolidated
financial statements have been prepared in conformity with U.S. GAAP, which contemplates continuation of the Company as a going
concern and the realization of assets and satisfaction of liabilities in the normal course of business. The carrying amounts of
assets and liabilities presented in the financial statements do not necessarily purport to represent realizable or settlement values.
The consolidated financial statements do not include any adjustment that might result from the outcome of this uncertainty.
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, achieving a level of profitable operations and receiving additional cash infusions. During the year ended
December 31, 2016, the Company obtained funds from the issuance of convertible note agreements and from sales of its common stock.
The Company also generated revenue of $5,071,095 and has standing purchase orders and open invoices with customers which will
provide funds for operations. Management believes this funding will continue from its’ current investors and from new investors.
Management believes the existing shareholders, the prospective new investors and revenue from operations 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 stock holders, 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., and OriginClear (HK) Company, Ltd. All material intercompany transactions have been eliminated
upon consolidation of these entities.
Cash
and Cash Equivalent
The
Company considers all highly liquid investments with an original maturity of three months or less to be cash equivalents.
Use
of Estimates
The
preparation of the 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.
ORIGINCLEAR,
INC. AND SUBSIDIARIES
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER
31, 2016 AND 2015
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICES (Continued)
Concentration
Risk
Cash
includes amounts deposited in financial institutions in excess of insurable Federal Deposit Insurance Company (FDIC) limits. At
times throughout the year, the Company may maintain cash balances in certain bank accounts in excess of FDIC limits. As of December
31, 2016, the cash balance in excess of the FDIC limits was $1,327. The Company has not experienced any losses in such accounts
and believes it is not exposed to any significant credit risk in these accounts.
Loss
per Share Calculations
Basic
loss per share calculations are computed by dividing income (loss) available to common shareholders by the weighted-average number
of common shares available. Diluted earnings per share is computed similar to basic earnings per share except that the denominator
is increased to include securities or other contracts to issue common stock that would have been outstanding if the potential
common shares had been issued and if the additional common shares were dilutive. The Company’s diluted loss per share is
the same as the basic loss per share for the years ended December 31, 2016 and 2015, respectively, as the inclusion of any potential
shares would have had an anti-dilutive effect due to the Company generating a loss.
|
|
|
|
For the Years Ended
|
|
|
|
|
|
2016
|
|
|
2015
|
|
|
|
(Loss) to common shareholders (Numerator)
|
|
$
|
(4,145,830
|
)
|
|
$
|
(11,615,066
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic and diluted weighted average number of common shares outstanding denominator
|
|
|
503,413,873
|
|
|
|
159,667,650
|
|
The Company has excluded 129,412,311
stock options, 17,710,925 warrants, and the shares issuable from convertible debt of $4,152,068 and shares issuable from convertible
preferred stock for the year ended December 31, 2016 because their impact on the loss per share is anti-dilutive.
The
Company has excluded 119,404,644 stock options, 23,297,108 warrants, and the shares issuable from convertible debt of $4,440,172
and shares issuable from convertible preferred stock for the for the year ended December 31, 2015 because their impact on the
loss per share is anti-dilutive.
Work-in-Process
The
Company recognizes as an asset the accumulated costs for work-in-process on projects expected to be delivered to customers. Work
in Process includes the cost price of materials and labor related to the construction of equipment to be sold to customers.
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. The cost in excess of billings for
the years ending December 31, 2016 and 2015, were $47,612 and $16,748, respectively. The billing in excess of cost was for the
years ending December 31, 2016 and 2015, was $0 and $503,718, respectively.
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 CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER
31, 2016 AND 2015
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICES (Continued)
Percentage
of completion
(Continued)
Contract
receivables are recorded on contracts for amounts currently due based upon progress billings, as well as retention, which are
collectible upon completion of the contracts. Accounts payable to material suppliers and subcontractors are recorded for amounts
currently due based upon work completed or materials received, as are retention due subcontractors, which are payable upon completion
of the contract. General and administrative expenses are charged to operations as incurred and are not allocated to contract costs.
Contract
Receivable
The
Company bills its customers in accordance with contractual agreements. The agreements generally require billing to be on a progressive
basis as work is completed. Credit is extended based on evaluation of clients financial condition and collateral is not required.
The Company maintains an allowance for doubtful accounts for estimated losses that may arise if any customer is unable to make
required payments. Management performs a quantitative and qualitative review of the receivables past due from customers on a monthly
basis. The Company records an allowance against uncollectible items for each customer after all reasonable means of collection
have been exhausted, and the potential for recovery is considered remote. The allowance for doubtful accounts was approximately
$50,000 as of December 31, 2016 and 2015, respectively. The net contract receivable balance was $382,895 and $1,066,223 at December
31, 2016 and 2015, respectively.
Indefinite
Lived Intangibles and Goodwill Assets
The
Company accounts for business combinations under the acquisition method of accounting in accordance with ASC 805, “Business
Combinations,” where the total purchase price is allocated to the tangible and identified intangible assets acquired and
liabilities assumed based on their estimated fair values. The purchase price is allocated using the information currently available,
and may be adjusted, up to one year from acquisition date, after obtaining more information regarding, among other things, asset
valuations, liabilities assumed and revisions to preliminary estimates. The purchase price in excess of the fair value of the
tangible and identified intangible assets acquired less liabilities assumed is recognized as goodwill.
The
Company tests for indefinite lived intangibles and goodwill impairment in the fourth quarter of each year and whenever events
or circumstances indicate that the carrying amount of the asset exceeds its fair value and may not be recoverable. In accordance
with its policies, the Company performed a qualitative assessment of indefinite lived intangibles and goodwill at December 31,
2016 and 2015, and determined there was no impairment of indefinite lived intangibles and goodwill.
Research
and Development
Research
and development costs are expensed as incurred. Total research and development costs were $502,209 and $814,014 for the years
ended December 31, 2016 and 2015, respectively.
Advertising
Costs
The
Company expenses the cost of advertising and promotional materials when incurred. The advertising costs were $189,429 and $164,463
for the years ended December 31, 2016 and 2015, respectively.
Property
and Equipment
Property
and equipment are stated at cost. Gain or loss is recognized upon disposal of property and equipment, and the asset and related
accumulated depreciation are removed from the accounts. Expenditures for maintenance and repairs are charged to expense as incurred,
while expenditures for addition and betterment are capitalized. Furniture and equipment are depreciated on the straight-line method
and include the following categories:
|
|
Estimated Life
|
|
|
|
|
|
|
Machinery and equipment
|
|
|
5-10 years
|
|
|
|
Furniture, fixtures and computer equipment
|
|
|
5-7 years
|
|
|
|
Vehicles
|
|
|
3-5 years
|
|
|
|
Leasehold improvements
|
|
|
2-5 years
|
|
Long-lived
assets held and used by the Company are reviewed for impairment whenever events or changes in circumstances indicate that the
carrying amount of an asset may not be recoverable. In the event that facts and circumstances indicate that the cost of any long-lived
assets may be impaired, an evaluation of recoverability would be performed following generally accepted accounting principles.
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.
ORIGINCLEAR,
INC. AND SUBSIDIARIES
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER
31, 2016 AND 2015
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICES (Continued)
Accounting
for Derivatives
The
Company evaluates all of its financial instruments to determine if such instruments are derivatives or contain features that qualify
as embedded derivatives. For derivative financial instruments that are accounted for as liabilities, the derivative instrument
is initially recorded at its fair value and is then re-valued at each reporting date, with changes in the fair value reported
in the statements of operations. For stock-based derivative financial instruments, the Company uses a probability weighted average
series Black-Scholes-Merton option pricing models to value the derivative instruments at inception and on subsequent valuation
dates.
The
classification of derivative instruments, including whether such instruments should be recorded as liabilities or as equity, is
evaluated at the end of each reporting period. Derivative instrument liabilities are classified in the balance sheet as current
or non-current based on whether or not net-cash settlement of the derivative instrument could be required within 12 months of
the balance sheet date.
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 December 31, 2016, the balances reported for cash, contract receivables,
cost in excess of billing, prepaid expenses, accounts payable, billing in excess of cost, and accrued expenses approximate the
fair value because of their short maturities.
We
adopted ASC Topic 820 for financial instruments measured as fair value on a recurring basis. ASC Topic 820 defines fair value,
established a framework for measuring fair value in accordance with accounting principles generally accepted in the United States
and expands disclosures about fair value measurements.
Fair
value is defined as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction
between market participants at the measurement date. ASC Topic 820 established a three-tier fair value hierarchy which prioritizes
the inputs used in measuring fair value. The hierarchy gives the highest priority to unadjusted quoted prices in active markets
for identical assets or liabilities (level 1 measurements) and the lowest priority to unobservable inputs (level 3 measurements).
These tiers include:
|
●
|
Level
1, defined as observable inputs such as quoted prices for identical instruments in active markets;
|
|
|
|
|
●
|
Level
2, defined as inputs other than quoted prices in active markets that are either directly or indirectly observable such as
quoted prices for similar instruments in active markets or quoted prices for identical or similar instruments in markets that
are not active; and
|
|
|
|
|
|
Level
3, defined as unobservable inputs in which little or no market data exists, therefore requiring an entity to develop its own assumptions,
such as valuations derived from valuation techniques in which one or more significant inputs or significant value drivers are
unobservable.
|
The
following table presents certain investments and liabilities of the Company’s financial assets measured and recorded at
fair value on the Company’s balance sheets on a recurring basis and their level within the fair value hierarchy as
of December 31, 2016 and 2015.
|
|
|
|
Total
|
|
|
(Level 1)
|
|
|
(Level 2)
|
|
|
(Level 3)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Derivative Liability, December 31, 2016
|
|
$
|
8,702,083
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
8,702,083
|
|
|
|
Derivative Liability, December 31, 2015
|
|
$
|
9,317,475
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
9,317,475
|
|
The
following is a reconciliation of the derivative liability for which level 3 inputs were used in determining the approximate fair
value:
|
|
Balance as of January 1, 2015
|
|
$
|
4,052,401
|
|
|
|
Fair Value of derivative liabilities issued
|
|
|
2,408,157
|
|
|
|
Loss on conversion of debt and change in derivative liability
|
|
|
2,856,917
|
|
|
|
Balance as of December 31, 2015
|
|
$
|
9,317,475
|
|
|
|
Fair Value of derivative liabilities issued
|
|
|
1,122,762
|
|
|
|
Gain on conversion of debt and change in derivative liability
|
|
|
(1,738,154
|
)
|
|
|
Balance as of December 31, 2016
|
|
$
|
8,702,083
|
|
ORIGINCLEAR,
INC. AND SUBSIDIARIES
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER
31, 2016 AND 2015
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICES (Continued)
Fair
Value of Financial Instruments
(Continued)
For
purpose of determining the fair market value of the derivative liability, the Company used Binomial lattice formula valuation
model. The significant assumptions used in the Binomial lattice formula valuation of the derivative are as follows:
|
|
|
|
|
12/31/2016
|
|
|
|
12/31/2015
|
|
|
|
Risk free interest rate
|
|
|
.01% - 1.02
|
%
|
|
|
.14% - 1.31
|
%
|
|
|
Stock volatility factor
|
|
|
4.72% - 189.09
|
%
|
|
|
35.80% - 103.83
|
%
|
|
|
Weighted average expected option life
|
|
|
6 months - 5 years
|
|
|
|
6 months - 2.75 year
|
|
|
|
Expected dividend yield
|
|
|
None
|
|
|
|
None
|
|
Segment
Reporting
The
Company’s business currently operates in one segment based upon the Company’s organizational structure and the way
in which the operations are managed and evaluated.
Recently
Issued Accounting Pronouncements
In
February 2016, the FASB issued ASU No. 2016-2, which creates ASC Topic 842, “Leases.” This update increases transparency
and comparability among organizations by recognizing lease assets and lease liabilities on the balance sheet and disclosing key
information about leasing arrangements. This guidance is effective for interim and annual reporting periods beginning after December
15, 2018. We are evaluating what impact, if any, the adoption of this guidance will have on our financial condition, results of
operations, cash flows or financial disclosures.
In
March 2016, the FASB issued ASU No. 2016-9, which amends ASC Topic 718, “Compensation – Stock Compensation.”
This amendment simplifies several aspects of the accounting for share-based payment transactions, including the income tax consequences,
classification of awards as either equity or liabilities and classification on the statement of cash flows. This guidance is effective
for interim and annual reporting periods beginning after December 15, 2016. We are evaluating what impact, if any, the adoption
of this guidance will have on our financial condition, results of operations, cash flows or financial disclosures.
In
August 2016, the FASB issued ASU No. 2016-15 which amends ASC Topic 230, “Classification of Certain Cash Receipts and Cash
Payments.” The amendments in this Update address eight specific cash flow issues with the objective of reducing the existing
diversity in practice. The update outlines the classification of specific transactions as either cash inflows or outflows from
financing activities, operating activities, investing activities or non-cash activities. This guidance is effective for interim
and annual reporting periods beginning after December 15, 2017. We are evaluating what impact, if any, the adoption of this guidance
will have on our financial condition, results of operations, cash flows or financial disclosures.
Management
reviewed currently issued pronouncements during the year ended December 31, 2016, and does not believe that any other recently
issued, but not yet effective, accounting standards, if currently adopted, would have a material effect on the accompanying
financial statements.
3. BUSINESS ACQUISITION
On
October 1, 2015, the Company acquired 100% of the issued and outstanding stock of Progressive Water Treatment, Inc. (PWT) for
a convertible promissory note in the principle amount of $1,500,000. 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.
The
Company acquired PWT 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 at a conversion price of $0.03 per share, including a makegood provision at $0.01 per share, which may be converted to 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 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 owned. This brief description of the Certificate
of Designation is only a summary of the material terms and is qualified in its entirety by reference to the full text of the form
of the Certificate of Designation as attached to this Current Report
on as Exhibit 3.8.
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.
ORIGINCLEAR,
INC. AND SUBSIDIARIES
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER
31, 2016 AND 2015
3. BUSINESS ACQUISITION (Continued)
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 values 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:
|
|
|
|
12/31/2016
|
|
|
12/31/2015
|
|
|
|
Convertible promissory note
|
|
$
|
1,500,000
|
|
|
$
|
1,500,000
|
|
|
|
Total purchase price
|
|
$
|
1,500,000
|
|
|
$
|
1,500,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Tangible assets acquired
|
|
$
|
1,549,700
|
|
|
$
|
1,549,700
|
|
|
|
Liabilities assumed
|
|
|
(731,845
|
)
|
|
|
(537,147
|
)
|
|
|
|
|
$
|
817,855
|
|
|
$
|
1,012,553
|
|
|
|
Goodwill
|
|
|
682,145
|
|
|
|
487,447
|
|
|
|
Total purchase price
|
|
$
|
1,500,000
|
|
|
$
|
1,500,000
|
|
As
of December 31, 2016, the Company has not identified any intangible assets other than goodwill. The above fair value of the intangible
assets of PWT is based on a final purchase price allocation prepared by management. Any adjustments after the preliminary purchase
price allocation period, will be recorded as 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.
Pro
forma 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.
|
|
|
|
Year Ended
December 31, 2015
|
|
|
|
Total Revenues
|
|
$
|
4,999,834
|
|
|
|
Net Income (Loss)
|
|
$
|
(11,545,002
|
)
|
|
|
Basic and Diluted Net Income (Loss) Per Common Share
|
|
$
|
(0.07
|
)
|
4. PROPERTY
& EQUIPMENT
Property
and Equipment consists of the following as of December 31, 2016 and 2015:
|
|
|
|
2016
|
|
|
2015
|
|
|
|
|
|
|
|
|
|
|
|
|
Machinery & equipment
|
|
$
|
164,904
|
|
|
|
155,019
|
|
|
|
Furniture & fixtures
|
|
|
27,452
|
|
|
|
27,452
|
|
|
|
Computer equipment
|
|
|
53,842
|
|
|
|
53,594
|
|
|
|
Vehicles
|
|
|
31,358
|
|
|
|
31,358
|
|
|
|
Leasehold improvements
|
|
|
26,725
|
|
|
|
121,639
|
|
|
|
|
|
|
304,281
|
|
|
|
389,062
|
|
|
|
Less accumulated depreciation and amortization
|
|
|
(142,369
|
)
|
|
|
(191,805
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
161,912
|
|
|
|
197,257
|
|
During
the years ended December 31, 2016 and 2015, depreciation and amortization expense was $45,478 and $22,598, respectively.
ORIGINCLEAR,
INC. AND SUBSIDIARIES
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER
31, 2016 AND 2015
5. CAPITAL STOCK
Preferred
Stock
On
April 10, 2015, the Corporation filed a Certificate of Designation for its Series A Preferred Stock with the Secretary of State
of Nevada (the “Old Series A Certificate of Designation”) designating 1, 000 shares of its authorized preferred stock
as Series A Preferred Stock, par value $0.0001 per share. On July 9, 2015, the 1,000 shares of Old Series A Preferred Stock issued
to T. Riggs Eckelberry were automatically redeemed by the Corporation, and there are no shares of Old Series A Preferred Stock
outstanding. The Board of Directors approved the cancellation of the Old Series A Shares and withdrawal of the Old Series A Certificate
of Designation.
On
July 31, 2015, the Board of Directors of the Company adopted a Certificate of Designation establishing the rights, preferences,
privileges and other terms of Series B Preferred Stock, par value $0.0001 per share which will consist of 10,000 shares (the “Series
B Preferred Stock”). On October 1, 2015, the Company filed the Certificate of Designation for the Series B Preferred Stock
with the Secretary of State of Nevada and Series B Shares were issued to the shareholders of Progressive Water Treatment, Inc.
in connection with the share exchange agreement. One third (1/3) of the shares received by the holder may be converted into common
stock beginning one (1) year after the first date on which a share of Series B Preferred Stock was issued (the “Original
Issue Date); one third (1/3) may be converted beginning two (2) years after the original issue date; and the remaining one third
(1/3) may be converted beginning three years after the original issue date. The number of shares of common stock issuable for
each share of converted Series B Preferred Stock shall be calculated by dividing the stated value by the market price, the market
price shall be the average of the closing trade prices of the twenty-five (25) days prior to the date of the conversion notice.
On August 12, 2016, the agreement was amended to include make-good-shares. The conversion price set forth in Section 1.2 of the
agreement shall be adjusted to reflect the lower of $0.03 or the price of the Company’s Common Stock calculated using the
average closing prices of the Company’s Common Stock on the last three (3) trading days prior to the date of conversion,
provided, however, if the Average Closing Price is less than $0.01 per share, the adjusted conversion price shall be $0.01 per
share. See Note 3.
The
Series B Preferred Stock has redemption features that are redeemable solely at the option of the Company. 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 at a
conversion price of $0.03 per share, which may be converted to 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. Accordingly, the
preferred stock is valued under the provision of ASC Topic 815, Derivatives and Hedging, because the conversion feature of the
preferred stock was not afforded the exemption for conventional convertible instruments due to its variable conversion rate. The
Series B Preferred Stock shall have the rights, preferences and privileges as set forth in the exchange agreement.
During
the year ended December 31, 2016, the Company issued 16,670,000 shares of common stock upon conversion of 3,334 shares of preferred
stock at a price of $0.03 per share, plus 33,340,000 make good shares at a price of $0.01 per share.
On
September 29, 2015, the Board of Directors of OriginClear, Inc. (the “Company”) adopted a Certificate of Designation
establishing the rights, preferences, privileges and other terms of Series A Preferred Stock, par value $0.0001 per share, (“New
Series A Preferred Stock”) providing for supermajority voting rights to holders of New Series A Preferred Stock. The Board
believes that it is in the best interest of the stockholders of the Corporation that the New Series A Preferred Stock be issued
to the Company’s Chief Executive Officer and Director, T. Riggs Eckelberry. Upon filing of the New Series A Preferred Stock
Certificate of Designation in accordance with the provisions of Nevada law, the Board authorized the Corporation to issue 1,000
shares of New Series A Preferred Stock to Mr. Eckelberry.
Common
Stock
Year
ended December 31, 2016
The
Company issued 117,821,672 shares of common stock through a private placement at a price of $0.01 per share for cash in the amount
of $1,140,717.
The Company issued 135,812,528
shares of common stock for the settlement of convertible promissory notes in an aggregate principal in the amount of $669,000,
plus interest in the amount of $110,665, based upon conversion prices of $0.00975 up to $0.035.
The
Company issued 18,910,088 shares of common stock for the settlement of accounts payable with a fair value of $175,000.
The
Company issued 81,445,772 shares of common stock for supplemental shares based on an agreement entered into with the subscribers
of the original subscription agreement. Under the terms of the supplemental agreement, if at any time within eighteen (18) months
following the issuance of shares to the subscriber (the “Adjustment Period”) the market price (as defined below) of
the Company's common stock is less than the price per share, then the price per share shall be reduced one
time to the market price (the "Adjusted Price") such that the Company shall promptly issue additional shares of the
Company's common stock to the Subscriber for no additional consideration, in an amount sufficient that the aggregate
purchase price, when divided by the total number of shares purchased thereunder plus those shares of common stock issued as a
result of the dilutive Issuance will equal the adjusted price. For the purposes hereof: the ''Market Price" shall
mean the average closing price of the Company's common stock for any ten (10) consecutive trading days during the Adjustment
Period.
The Company issued 113,407,052 shares of common stock for services at fair value of $1,212,103.
ORIGINCLEAR,
INC. AND SUBSIDIARIES
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER
31, 2016 AND 2015
5. CAPITAL STOCK (Continued)
Common
Stock
(Continued)
Year
ended December 31, 2015
The
Company issued 35,568,348 shares of common stock through a private placement at a price of $0.03 per share for cash in the amount
of $1,042,050.
The
Company issued 6,840,291 shares of common stock for exercise of the purchase warrants in the amount of 6,840,291 for prices ranging
from $0.02 to $0.05 per share for cash in the amount of $303,681.
The
Company issued 49,163,259 shares of common stock for the settlement of convertible promissory notes in an aggregate principal
in the amount of $965,000, plus interest in the amount of $108,442, based upon conversion prices of $0.00975 up to $0.14.
The
Company issued 12,199,951 shares of common stock for the settlement of accounts payable with a fair value of $383, 531.
The
Company issued 3,857,206 shares of common stock for supplemental shares based on an agreement entered into with the subscribers
of the original subscription agreement. Under the terms of the supplemental agreement, if at any time within eighteen (18) months
following the issuance of shares to the subscriber (the “Adjustment Period”) the market price (as defined below) of
the Company's common stock is less than the price per share, then the price per share shall be reduced one
time to the market price (the "Adjusted Price") such that the Company shall promptly issue additional shares of the
Company's common stock to the Subscriber for no additional consideration, in an amount sufficient that the aggregate
purchase price, when divided by the total number of shares purchased thereunder plus those shares of common stock issued as a
result of the dilutive Issuance will equal the adjusted price. For the purposes hereof: the ''Market Price" shall
mean the average closing price of the Company's common stock for any ten (10) consecutive trading days during the Adjustment
Period.
The
Company issued 25,211,601 shares of common stock for services at fair value of $1,260,521.
6. CONVERTIBLE PROMISSORY NOTES
Convertible
promissory notes payable consist of the following as of December 31, 2016 and 2015:
|
|
|
|
2016
|
|
|
2015
|
|
|
|
|
|
|
|
|
|
|
|
|
Convertible Promissory Notes
|
|
$
|
3,280,000
|
|
|
$
|
3,735,000
|
|
|
|
OID Notes
|
|
|
184,125
|
|
|
|
273,125
|
|
|
|
Convertible Note
|
|
|
687,943
|
|
|
|
432,047
|
|
|
|
Total Notes
|
|
|
4,152,068
|
|
|
|
4,440,172
|
|
|
|
Debt Discount
|
|
|
(603,264
|
)
|
|
|
(161,857
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
3,548,804
|
|
|
$
|
4,278,315
|
|
On
various dates the Company entered into unsecured convertible Notes (the “Convertible Promissory Notes” or “Notes”),
that mature between six and sixty months from the date of issuance and bear interest at 10% per annum. The Notes mature on various
dates through March 17, 2021. The Notes may be converted into shares of the Company’s common stock at conversion prices
ranging from the lesser of $0.02 to $0.18 (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. During the year ended December 31, 2016,
the Company issued 125,341,939 shares of common stock upon conversion of $580,000 in aggregate principal, plus accrued interest
of $110,665. As of December 31, 2016, the Notes had an aggregate remaining balance of $1,955,000. The Company recorded amortization
of debt discount, which was recognized as interest expense in the amount of $1,691 during the year ended December 31, 2016.
ORIGINCLEAR,
INC. AND SUBSIDIARIES
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER
31, 2016 AND 2015
6. 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 had a maturity date of December 31, 2015. The Notes were extended through April 2020. 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 year ended December 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 on various dates ending on May 19, 2016. As of December 31, 2016, the Company has received
tranches in the aggregate of $1,325,000. The notes matured between nine and sixty months from the date of each tranche and bears
interest at 10% per annum. The Notes were extended and mature on various dates ending on May 17, 2021. The Notes may be converted
into shares of the Company’s common stock at conversion prices ranging from the lesser of $0.02 to $0.18 (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 $108,550 during the year ended December 31, 2016.
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 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 $216,024 during the year ended December
31, 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 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 $161,428
during the year ended December 31, 2016.
We
evaluated the financing transactions in accordance with ASC Topic 815, Derivatives and Hedging, and determined that the conversion
feature of the convertible promissory notes was not afforded the exemption for conventional convertible instruments due to its
variable conversion rate. The note has no explicit limit on the number of shares issuable so they did not meet the conditions
set forth in current accounting standards for equity classification. The Company elected to recognize the note under paragraph
815-15-25-4, whereby, there would be a separation into a host contract and derivative instrument. The Company elected to initially
and subsequently measure the note in its entirety at fair value, with changes in fair value recognized in earnings. The Company
recorded a derivative liability representing the imputed interest associated with the embedded derivative. The derivative liability
is adjusted periodically according to the stock price fluctuations.
The
derivative liability recognized in the financial statements as of December 31, 2016 was $8,702,083.
ORIGINCLEAR,
INC. AND SUBSIDIARIES
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER
31, 2016 AND 2015
7. OPTIONS AND WARRANTS
Options
The
Board of Directors adopted the 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.
On
September 29, 2015, the Board of Directors adopted a new OriginClear, Inc., 2015 Equity Incentive Stock Option Plan (the “2015
Plan”) for the purposes of granting stock options to its employees and others providing services to the Company, which reserves
and sets aside for the granting of options for One Hundred Sixteen Million Fifty Thousand (116,050,000) shares of Common Stock. On
October 2, 2015, the Board of Directors amended the number of shares to reserve for issuance to 160,000,000 shares. 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.
During the year ended December 31,
2016, the Company granted 1,500,000 shares of incentive stock options to employees, and 15,000,000 shares of non-statutory options
to consultants. Each option shall be exercisable to the nearest whole share, in installments or otherwise, as the respective option
agreements may provide. The stock options mature on March 29, 2021 and October 17, 2021, at prices of $0.0084 and $0.0375.
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.
ORIGINCLEAR,
INC. AND SUBSIDIARIES
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER
31, 2016 AND 2015
7. OPTIONS
AND WARRANTS (Continued)
Options
(Continued)
A
summary of the Company’s stock option activity and related information follows:
|
|
|
|
December 31, 2016
|
|
|
December 31, 2015
|
|
|
|
|
|
|
|
|
Weighted
|
|
|
|
|
|
Weighted
|
|
|
|
|
|
Number
|
|
|
average
|
|
|
Number
|
|
|
average
|
|
|
|
|
|
of
|
|
|
exercise
|
|
|
of
|
|
|
exercise
|
|
|
|
|
|
Options
|
|
|
price
|
|
|
Options
|
|
|
price
|
|
|
|
Outstanding, beginning of year
|
|
|
119,404,644
|
|
|
$
|
0.050
|
|
|
|
4,404,643
|
|
|
$
|
0.43
|
|
|
|
Granted
|
|
|
16,500,000
|
|
|
$
|
0.009
|
|
|
|
116,050,000
|
|
|
$
|
0.04
|
|
|
|
Exercised
|
|
|
-
|
|
|
$
|
-
|
|
|
|
-
|
|
|
$
|
-
|
|
|
|
Forfeited/Expired
|
|
|
(6,492,333
|
)
|
|
$
|
0.070
|
|
|
|
(1,049,999
|
)
|
|
$
|
0.41
|
|
|
|
Outstanding, end of year
|
|
|
129,412,311
|
|
|
$
|
0.043
|
|
|
|
119,404,644
|
|
|
$
|
0.05
|
|
|
|
Exercisable at the end of year
|
|
|
91,880,144
|
|
|
$
|
0.049
|
|
|
|
73,609,937
|
|
|
$
|
0.05
|
|
|
|
Weighted average fair value of options granted during the year
|
|
|
|
|
|
$
|
0.009
|
|
|
|
|
|
|
$
|
0.04
|
|
The
weighted average remaining contractual life of options outstanding issued under the 2009 Plan, 2012 Plan, and 2013 Plan as of
December 31, 2016 was as follows:
|
|
|
|
|
|
|
|
|
|
|
Weighted
|
|
|
|
|
|
|
|
|
|
|
|
|
Average
|
|
|
|
|
|
|
Stock
|
|
|
Stock
|
|
|
Remaining
|
|
|
|
Exercisable
|
|
|
Options
|
|
|
Options
|
|
|
Contractual
|
|
|
|
|
Prices
|
|
|
|
Outstanding
|
|
|
|
Exercisable
|
|
|
|
Life
(years)
|
|
|
|
$
|
0.19
- 4.20
|
|
|
|
1,829,645
|
|
|
|
1,626,520
|
|
|
|
5.59
- 7.77
|
|
|
|
$
|
0.29
- 0.44
|
|
|
|
1,132,666
|
|
|
|
920,291
|
|
|
|
6.71
|
|
|
|
$
|
0.04
|
|
|
|
126,450,000
|
|
|
|
89,333,333
|
|
|
|
3.77
- 4.80
|
|
|
|
|
|
|
|
|
129,412,311
|
|
|
|
91,880,144
|
|
|
|
|
|
Stock-based
compensation expense recognized during the year is based on the value of the portion of stock-based payment awards that is ultimately
expected to vest. Stock-based compensation expense recognized in the financial statements of operations during the years ended
December 31, 2016 and 2015 were $533,009 and $1,739,620, respectively.
Restricted
Stock to CEO
On
May 12, 2016, the Company entered into a Restricted Stock Grant Agreement (“the RSGA”) with its Chief Executive Officer,
Riggs Eckelberry, to create management incentives to improve the economic performance of the Company and to increase its value
and stock price. All shares issuable under the RSGA are performance based shares and none have yet vested nor have any been issued.
The RSGAs provides for the issuance of up to 60,000,000 shares of the Company’s common stock to the Employees provided certain
milestones are met in certain stages; a) If the Company’s consolidated gross revenue, calculated in accordance with generally
accepted accounting principles, consistently applied, equals or exceeds $15,000,000 for the trailing twelve month period as reported
in the Company’s quarterly or annual financial statements, the Company will issue up to 30,000,000 shares of its 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 with generally accepted accounting principles,
equals or exceeds $1,500,000 for the trailing twelve month period as reported as reported in the Company’s SEC Reports,
the Company will issue up to 30,000,000 shares of its common stock. The Company has not recognized any costs associated with the
milestones, due to not being able to estimate the probability of it being achieved. As the performance goals are achieved, the
shares shall become eligible for vesting and issuance.
On
August 10, 2016, the Company entered into a Restricted Stock Grant Agreement (“the RSGA”) with its Chief Executive
Officer, Riggs Eckelberry, to create management incentives to improve the economic performance of the Company and to increase
its value and stock price. All shares issuable under the RSGA are performance based shares and none have yet vested nor have any
been issued. The RSGA provides for the issuance of up to 60,000,000 shares of the Company’s common stock to the CEO provided
certain milestones are met in certain stages; a) If the Company’s consolidated gross revenue, calculated in accordance with
generally accepted accounting principles, consistently applied, equals or exceeds $15,000,000 for the trailing twelve month period,
the Company will issue up to 30,000,000 shares of its 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
with generally accepted accounting principles, equals or exceeds $1,500,000 for the trailing twelve month period as reported as
reported in the Company’s SEC Reports, the Company will issue up to 30,000,000 shares of its common stock. The Company has
not recognized any costs associated with the milestones, due to not being able to estimate the probability of it being achieved.
As the performance goals are achieved, the shares shall become eligible for vesting and issuance.
ORIGINCLEAR,
INC. AND SUBSIDIARIES
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER
31, 2016 AND 2015
7. OPTIONS
AND WARRANTS (Continued)
Restricted
Stock to Employees and Consultants
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 based shares and none have yet vested nor have any been issued. The RSGAs provides for
the issuance of up to 30,000,000 shares of the Company’s common stock to the Employees provided certain milestones are met
in certain stages; a) If the Company’s consolidated gross revenue, calculated in accordance with generally accepted accounting
principles, consistently applied, equals or exceeds $15,000,000 for the trailing twelve month period as reported in the Company’s
quarterly or annual financial statements, the Company will issue up to 15,000,000 shares of its 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 with generally accepted accounting principles, equals or exceeds $1,500,000
for the trailing twelve month period as reported as reported in the Company’s SEC Reports, the Company will issue up to
15,000,000 shares of its common stock. The Company has not recognized any costs associated with the milestones, due to not being
able to estimate the probability of it being achieved. As the performance goals are achieved, the shares shall become eligible
for vesting and issuance.
On
May 12, 2016, the Company entered into a Restricted Stock Grant Agreement (“the 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 based shares and none have yet vested nor have any been issued. The RSGAs provides for
the issuance of up to 20,000,000 shares of the Company’s common stock to the Employees provided certain milestones are met
in certain stages; a) If the Company’s consolidated gross revenue, calculated in accordance with generally accepted accounting
principles, consistently applied, equals or exceeds $15,000,000 for the trailing twelve month period as reported in the Company’s
quarterly or annual financial statements, the Company will issue up to 10,000,000 shares of its 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 with generally accepted accounting principles, equals or exceeds $1,500,000
for the trailing twelve month period as reported as reported in the Company’s SEC Reports, the Company will issue up to
10,000,000 shares of its common stock. The Company has not recognized any costs associated with the milestones, due to not being
able to estimate the probability of it being achieved. As the performance goals are achieved, the shares shall become eligible
for vesting and issuance.
On
August 10, 2016, the Company entered into a Restricted Stock Grant Agreement (“the RSGA”) with two of its’ consultants,
to create management incentives to improve the economic performance of the Company and to increase its value and stock price.
All shares issuable under the RSGA are performance based shares and none have yet vested nor have any been issued. The RSGA provides
to each of the consultants the issuance of up to 10,000,000 shares of the Company’s common stock provided certain milestones
are met in certain stages; a) If the Company’s consolidated gross revenue, calculated in accordance with generally accepted
accounting principles, consistently applied, equals or exceeds $15,000,000 for the trailing twelve month period, the Company will
issue to each of the consultants up to 5,000,000 shares of its 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 with generally accepted accounting principles, equals or exceeds $1,500,000 for the trailing twelve
month period as reported as reported in the Company’s SEC Reports, the Company will issue up to 5,000,000 shares to each
of the consultants, its common stock. The Company has not recognized any costs associated with the milestones, due to not being
able to estimate the probability of it being achieved. As the performance goals are achieved, the shares shall become eligible
for vesting and issuance.
Warrants
During
the year ended December 31, 2016, no warrants were issued by the Company. A summary of the Company’s warrant activity and
related information follows for the years ended December 31, 2016 and 2015:
|
|
|
|
December 31, 2016
|
|
|
December 31, 2015
|
|
|
|
|
|
|
|
|
Weighted
|
|
|
|
|
|
Weighted
|
|
|
|
|
|
Number
|
|
|
average
|
|
|
Number
|
|
|
average
|
|
|
|
|
|
of
|
|
|
exercise
|
|
|
of
|
|
|
exercise
|
|
|
|
|
|
Warrants
|
|
|
price
|
|
|
Warrants
|
|
|
price
|
|
|
|
Outstanding -beginning of year
|
|
|
23,297,108
|
|
|
$
|
0.21
|
|
|
|
30,946,563
|
|
|
$
|
0.27
|
|
|
|
Granted
|
|
|
-
|
|
|
$
|
-
|
|
|
|
-
|
|
|
$
|
-
|
|
|
|
Exercised
|
|
|
-
|
|
|
$
|
-
|
|
|
|
(4,923,624
|
)
|
|
$
|
0.15
|
|
|
|
Forfeited
|
|
|
(5,586,183
|
)
|
|
$
|
0.16
|
|
|
|
(2,725,831
|
)
|
|
$
|
0.68
|
|
|
|
Outstanding - end of year
|
|
|
17,710,925
|
|
|
$
|
0.18
|
|
|
|
23,297,108
|
|
|
$
|
0.21
|
|
ORIGINCLEAR,
INC. AND SUBSIDIARIES
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER
31, 2016 AND 2015
7. OPTIONS
AND WARRANTS (Continued)
Warrants
(Continued)
At
December 31, 2016, the weighted average remaining contractual life of warrants outstanding:
|
|
|
|
|
|
|
|
|
|
|
Weighted
|
|
|
|
|
|
|
|
|
|
|
|
|
Average
|
|
|
|
|
|
|
|
|
|
|
|
|
Remaining
|
|
|
|
Exercisable
|
|
|
Warrants
|
|
|
Warrants
|
|
|
Contractual
|
|
|
|
Prices
|
|
|
Outstanding
|
|
|
Exercisable
|
|
|
Life
(years)
|
|
|
|
$
|
0.15
- 0.65
|
|
|
|
16,769,233
|
|
|
|
16,769,233
|
|
|
|
0.49
- 1.45
|
|
|
|
$
|
0.25
- 1.75
|
|
|
|
100,000
|
|
|
|
100,000
|
|
|
|
5.88
|
|
|
|
$
|
0.90
|
|
|
|
841,692
|
|
|
|
841,692
|
|
|
|
0.32
- 1.72
|
|
|
|
|
|
|
|
|
17,710,925
|
|
|
|
17,710,925
|
|
|
|
|
|
At
December 31, 2016, the aggregate intrinsic value of the warrants outstanding was $17,710,925.
8. INCOME TAXES
The
Company files income tax returns in the U.S. Federal jurisdiction, and the state of California. With few exceptions, the Company
is no longer subject to U.S. federal, state and local, or non-U.S. income tax examinations by tax authorities for years before
2013.
Deferred
income taxes have been provided by temporary differences between the carrying amounts of assets and liabilities for financial
reporting purposes and the amounts used for tax purposes. To the extent allowed by GAAP, we provide valuation allowances against
the deferred tax assets for amounts when the realization is uncertain. Included in the balance at December 31, 2016 and 2015,
are no tax positions for which the ultimate deductibility is highly certain, but for which there is uncertainty about the timing
of such deductibility. Because of the impact of deferred tax accounting, other than interest and penalties, the disallowance of
the shorter deductibility period would not affect the annual effective tax rate but would accelerate the payment of cash to the
taxing authority to an earlier period.
The
Company's policy is to recognize interest accrued related to unrecognized tax benefits in interest expense and penalties in operating
expenses. During the periods ended December 31, 2016 and 2015, the Company did not recognize interest and penalties.
At
December 31, 2016, the Company had net operating loss carry-forwards of approximately $31,163,800, which expire at dates that
have not been determined. No tax benefit has been reported in the December 31, 2016 financial statements since the potential tax
benefit is offset by a valuation allowance of the same amount.
The
income tax provision differs from the amount of income tax determined by applying the U.S. federal and state income tax rate to
pretax income from continuing operations for the years ended December 31, 2016 and 2015 due to the following:
|
|
|
|
2016
|
|
|
2015
|
|
|
|
Book loss
|
|
$
|
(1,658,300
|
)
|
|
$
|
(4,646,020
|
)
|
|
|
Tax to book differences for deductible expenses
|
|
|
(16,300
|
)
|
|
|
21,920
|
|
|
|
Tax non deductible expenses
|
|
|
919,200
|
|
|
|
2,926,750
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Valuation Allowance
|
|
|
755,400
|
|
|
|
1,697,350
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income tax expense
|
|
$
|
-
|
|
|
$
|
-
|
|
Deferred
taxes are provided on a liability method whereby deferred tax assets are recognized for deductible differences and operating loss
and tax credit carry-forwards and deferred tax liabilities are recognized for taxable temporary differences. Temporary differences
are the difference between the reported amounts of assets and liabilities and their tax bases. Deferred tax assets are reduced
by a valuation allowance when, in the opinion of management, it is more likely than not that some portion or all of the deferred
tax assets will not be realized. Deferred tax assets and liabilities are adjusted for the effects of changes in tax laws and rates
on the date of enactment.
ORIGINCLEAR,
INC. AND SUBSIDIARIES
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER
31, 2016 AND 2015
8. INCOME
TAXES (Continued)
Net
deferred tax liabilities consist of the following components as of December 31,
|
|
|
|
2016
|
|
|
2015
|
|
|
|
Deferred tax assets:
|
|
|
|
|
|
|
|
|
NOL carryover
|
|
$
|
12,465,500
|
|
|
$
|
11,838,190
|
|
|
|
Other carryovers
|
|
|
379,100
|
|
|
|
757,030
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Deferred tax liabilites:
|
|
|
|
|
|
|
|
|
|
|
Depreciation
|
|
|
(24,600
|
)
|
|
|
830
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Less Valuation Allowance
|
|
|
(12,820,000
|
)
|
|
|
(12,596,050
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net deferred tax asset
|
|
$
|
-
|
|
|
$
|
-
|
|
Due
to the change in ownership provisions of the Tax Reform Act of 1986, net operating loss carry-forwards for Federal income tax
reporting purposes are subject to annual limitations. Should a change in ownership occur, net operating loss carry-forwards may
be limited as to use in future years.
9. FOREIGN SUBSIDIARY
On
December 31, 2014, the Company formed a wholly owned subsidiary, OriginClear (HK) Limited (“OCHK”), in Hong Kong,
China. The Company granted OCHK a master license for the People’s Republic of China. In turn, OCHK is expected to license
regional joint ventures for frack and waste treatment. A research and manufacturing center are also planned.
10. COMMITMENTS
AND CONTINGENCIES
Operating
Lease
The
Company entered into an agreement for office space located in Los Angeles, California for an initial term starting from May 1,
2016 to July 31, 2016. The term automatically renewed for successive periods until terminated in accordance with the agreement.
Operating
Lease – Related Party
The
Company entered into a month-to-month lease agreement with a shareholder of the Company for office space in McKinney, Texas at
a base rent of $4,850 per month.
Warranty
Reserve
Generally,
a PWT project is guaranteed against defects in material and workmanship for one year from the date of completion, while certain
areas of construction and materials may have guarantees extending beyond one year. The Company has various insurance policies
relating to the guarantee of completed work, which in the opinion of management will adequately cover any potential claims. A
warranty reserve has been provided under PWT based on the opinion of management and based on Company history in the amount of
$20,000 for the year ending December 31, 2016.
Litigation
From
time to time, the Company may become involved in various lawsuits and legal proceedings which arise in the ordinary course of
business. However, litigation is subject to inherent uncertainties, and an adverse result in these or other matters may arise
from time to time that may harm our business. The Company is currently not party to any such legal proceedings that believes will
have, individually or in the aggregate, a material adverse effect on our business, financial condition or operating results.
11. CONCENTRATIONS
Major
Customers
PWT
had two major customers for the year ended December 31, 2016. The customers represented 58.74% of billings for the year ending
December 31, 2016. The contract receivable balance for the customers was $172,589 at December 31, 2016.
PWT
had three major customers for the three months ending December 31, 2015. The customers represented 72.6% of billings for the three
months ending December 31, 2015. The contract receivable balance for the customers was $810,093 at December 31, 2015.
ORIGINCLEAR,
INC. AND SUBSIDIARIES
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER
31, 2016 AND 2015
11. CONCENTRATIONS
(Continued)
Major
Suppliers
PWT
had four major vendors for the year ended December 31, 2016. The vendors represented 59.79% of total expenses in the year ending
December 31, 2016. The accounts payable balance due to the vendors was $38,554 at December 31, 2016. Management believes no risk
is present with the vendors due to other suppliers being readily available.
PWT
had three major vendors for the three months ending December 31, 2015. The vendors represented 44.3% of total expenses in the
three months ending December 31, 2015. The accounts payable balance due to the vendors was $51,643 at December 31, 2015. Management
believes no risk is present with the vendors due to other suppliers being readily available.
12. SUBSEQUENT EVENTS
Management
has evaluated subsequent events according to the requirements of ASC TOPIC 855 and has determined that there are the following
subsequent events:
Between January 6, 2017 and March
28, 2017, holders of convertible notes, known in our filings as “Convertible Promissory Notes” converted an aggregate
outstanding principal amount of $285,000, plus unpaid interest of $49,212 into an aggregate of 143,284,370 shares of the Company’s
common stock.
Between January 17, 2017 and March
29, 2017, the Company issued 66,937,500 shares of common stock for services at a fair value of $343,582.
In connection with certain one-time
make good agreements, between January 31, 2017 and February 28, 2017, the Company issued an aggregate of 7,093,305 shares of its
common stock to certain holders of its common stock.
Between January 12, 2017 and March
29, 2017, the Company sold, in a private placement, an aggregate of 84,700,000 shares of its common stock to accredited investors
for an aggregate consideration of $423,500 (the “Offering”). The shares issued in this Offering are subject to price
protection for a period of one year from the issuance of the share, if 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.
On March 14, 2017, the Company issued
1,000 shares of newly-created Series C Preferred Stock to the Company’s Chief Executive Officer and Director, T. Riggs Eckelberry.
On March 29, 2017, the Company
issued to two members of the Board of Directors an aggregate of 6,000,000 shares of the Company’s common stock for services
in lieu of cash consideration.
On
March 30, 2017, the Company filed a Certificate of Withdrawal of the Certificate of Designation for its Series A Preferred Stock
with the Secretary of State of Nevada following the mutual agreement between the Company and the holder of the Series A Preferred
Stock to irrevocably cancel all of the 1,000 shares of Series A Preferred Stock outstanding.
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