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
- AUDITED
DECEMBER 31, 2018 AND 2017
|
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. 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 Technologies Limited (OCT), formerly OriginClear (HK) Limited in Hong Kong, China.
The Company granted OCT a master license for the People’s Republic of China. In turn, OCT is expected to license regional
joint ventures for water treatment. As of December 31, 2018, OCT 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.
On July 19, 2018, the Company
announced the launch of its Modular Water Treatment Division. MWS designs, manufactures and implements advanced prepackaged wastewater
treatment, pump stations and custom systems with primary focus on decentralized opportunities away from the very competitive large
municipal wastewater treatment plants. These decentralized opportunities include: rural communities, housing developments, industrial
sites, schools and many more.
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, 2018, the Company did not generate significant revenue, incurred a net loss of $11,346,569 and used cash in operations of
$3,452,427. As of December 31, 2018, the Company had a working capital deficiency of $12,888,290 and a shareholders’
deficit of $16,624,530. 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, 2018 expressed substantial doubt about our ability to continue as a going concern.
The ability of the Company to
continue as a going concern and appropriateness of using the going concern basis is dependent upon, among other things, achieving
a level of profitable operations and receiving additional cash infusions. During the year ended December 31, 2018, the Company
obtained funds from the issuance of convertible note agreements and from sales of its common stock. Management believes this funding
will continue from its’ current investors and from new investors. The Company also generated revenue of $4,637,698 and has
standing purchase orders and open invoices with customers which will provide funds for operations. Management believes the existing
shareholders, the prospective new investors and future sales will provide the additional cash needed to meet the Company’s
obligations as they become due and will allow the development of its core business operations. No assurance can be given that any
future financing will be available or, if available, that it will be on terms that are satisfactory to the Company. Even if the
Company is able to obtain additional financing, it may contain undue restrictions on our operations, in the case of debt financing
or cause substantial dilution for our 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 Technologies, 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.
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, 2018, the cash balance
in excess of the FDIC limits was $0. The Company has not experienced any losses in such accounts and believes it is not exposed
to any significant credit risk in these accounts.
ORIGINCLEAR, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- AUDITED
DECEMBER 31, 2018 AND 2017
|
2.
|
SUMMARY OF SIGNIFICANT ACCOUNTING POLICES (Continued)
|
Use of Estimates
The preparation of financial
statements in conformity with accounting principles generally accepted in the United States of America requires management to make
estimates and assumptions that affect the reported amounts of assets and liabilities, disclosure of contingent assets and liabilities
at the date of the financial statements, and the reported amounts of revenues and expenses during the reporting period. Actual
results could differ from those estimates. Significant estimates include estimates used to review the Company’s impairments
and estimations of long-lived assets, revenue recognition on percentage of completion type contracts, allowances for uncollectible
accounts, warranty reserves, inventory valuation, derivative liabilities and other conversion features, fair value investments,
valuations of non-cash capital stock issuances and the valuation allowance on deferred tax assets. The Company bases its estimates
on historical experience and on various other assumptions that are believed to be reasonable in the circumstances, the results
of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent
from other sources. Actual results may differ from these estimates under different assumptions or conditions.
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 s
ecurities 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, 2018 and 2017, 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
|
|
|
|
2018
|
|
|
2017
|
|
(Loss) to common shareholders (Numerator)
|
|
$
|
(11,373,586
|
)
|
|
$
|
(5,231,805
|
)
|
|
|
|
|
|
|
|
|
|
Basic and diluted weighted average number of common shares outstanding denominator
|
|
|
446,668,160
|
|
|
|
53,303,847
|
|
The Company has excluded 250,912,025
warrants, shares issuable from convertible debt of $3,657,427 and shares issuable from convertible preferred stock for the year
ended December 31, 2018, because their impact on the loss per share is anti-dilutive.
The Company has excluded 3,697,495
stock options, 53,562,961 warrants, and the shares issuable from convertible debt of $3,818,068 and shares issuable from convertible
preferred stock for the year ended December 31, 2017, because their impact on the loss per share is anti-dilutive.
Work-in-Process
The Company
recognizes as an asset the accumulated costs for work-in-process on projects expected to be delivered to customers. Work in Process
includes the cost price of materials and labor related to the construction of equipment to be sold to customers.
Revenue Recognition
We recognize revenue when services
are performed, and at the time of shipment of products, provided that evidence of an arrangement exists, title and risk of loss
have passed to the customer, fees are fixed or determinable, and collection of the related receivable is reasonably assured.
Revenues and related costs on
construction contracts are recognized as the performance obligations for work are satisfied over time in accordance with Accounting
Standards Codification (“ASC”) 606, Revenue from Contracts with Customers. Under ASC 606, revenue and associated profit,
will be recognized as the customer obtains control of the goods and services promised in the contract (i.e., performance obligations).
All un-allocable indirect costs and corporate general and administrative costs are charged to the periods as incurred. However,
in the event a loss on a contract is foreseen, the Company will recognize the loss as it is determined.
Revisions in cost and profit
estimates during the course of the contract are reflected in the accounting period in which the facts 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.
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.
ORIGINCLEAR, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- AUDITED
DECEMBER 31, 2018 AND 2017
|
2.
|
SUMMARY OF SIGNIFICANT ACCOUNTING POLICES (Continued)
|
Contract Receivable
The Company bills its customers
in accordance with contractual agreements. The agreements generally require billing to be on a progressive basis as work is completed.
Credit is extended based on evaluation of clients financial condition and collateral is not required. The Company maintains an
allowance for doubtful accounts for estimated losses that may arise if any customer is unable to make required payments. Management
performs a quantitative and qualitative review of the receivables past due from customers on a monthly basis. The Company records
an allowance against uncollectible items for each customer after all reasonable means of collection have been exhausted, and the
potential for recovery is considered remote. The allowance for doubtful accounts was approximately $6,996 as of December 31, 2018
and 2017, respectively. The net contract receivable balance was $309,223 and $490,441 at December 31, 2018 and 2017, 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, 2018 and 2017, 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 $290,542 and $197,119 for the years ended December 31, 2018
and 2017, respectively.
Advertising Costs
The Company expenses the cost
of advertising and promotional materials when incurred. The advertising costs were $103,489 and $103,791 for the years ended December
31, 2018 and 2017, 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.
Depreciation expense during
the year ended December 31, 2018 and 2017, respectively was $56,521 and $52,555.
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
- AUDITED
DECEMBER 31, 2018 AND 2017
|
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 Binomial lattice 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, 2018, the balances reported for cash, contract receivables, cost in excess of billing, prepaid expenses,
accounts payable, billing in excess of cost, and accrued expenses approximate the fair value because of their short maturities.
We adopted ASC Topic 820 for
financial instruments measured as fair value on a recurring basis. ASC Topic 820 defines fair value, established a framework for
measuring fair value in accordance with accounting principles generally accepted in the United States and expands disclosures about
fair value measurements.
Fair value is defined as the
price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants
at the measurement date. ASC Topic 820 established a three-tier fair value hierarchy which prioritizes the inputs used in measuring
fair value. The hierarchy gives the highest priority to unadjusted quoted prices in active markets for identical assets or liabilities
(level 1 measurements) and the lowest priority to unobservable inputs (level 3 measurements). These tiers include:
|
●
|
Level 1, defined as observable inputs such as quoted prices for identical instruments in active markets;
|
|
|
|
|
●
|
Level 2, defined as inputs other than quoted prices in active markets that are either directly or indirectly observable such as quoted prices for similar instruments in active markets or quoted prices for identical or similar instruments in markets that are not active; and
|
|
|
|
|
●
|
Level 3, defined as unobservable inputs
in which little or no market data exists, therefore requiring an entity to develop its own assumptions, such as valuations derived
from valuation techniques in which one or more significant inputs or significant value drivers are unobservable.
|
The
following table presents certain investments and liabilities of the Company’s financial assets measured and recorded at
fair value on the Company’s balance sheets on a recurring basis and their level within the fair value hierarchy as
of December 31, 2018 and 2017.
|
|
Total
|
|
|
(Level 1)
|
|
|
(Level 2)
|
|
|
(Level 3)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Investment at fair value-securities
|
|
$
|
22,800
|
|
|
$
|
22,800
|
|
|
$
|
-
|
|
|
$
|
-
|
|
Total Assets measured at fair value
|
|
$
|
22,800
|
|
|
$
|
22,800
|
|
|
$
|
-
|
|
|
$
|
-
|
|
The
following is a reconciliation of the fair value securities for which level 3 inputs were used in determining the approximate fair
value:
|
|
Total
|
|
|
(Level 1)
|
|
|
(Level 2)
|
|
|
(Level 3)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Derivative Liability, December 31, 2018
|
|
$
|
9,360,204
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
9,360,204
|
|
Derivative Liability, December 31, 2017
|
|
$
|
5,531,183
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
5,531,183
|
|
ORIGINCLEAR, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- AUDITED
DECEMBER 31, 2018 AND 2017
|
2.
|
SUMMARY OF SIGNIFICANT ACCOUNTING POLICES (Continued)
|
Fair Value of Financial Instruments
(Continued)
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, 2017
|
|
$
|
8,702,083
|
|
Fair Value of derivative liabilities issued
|
|
|
53,551
|
|
Loss on conversion of debt and change in derivative liability
|
|
|
(3,224,451
|
)
|
Balance as of December 31, 2017
|
|
|
5,531,183
|
|
Fair Value of derivative liabilities issued
|
|
|
567,884
|
|
Gain on conversion of debt and change in derivative liability
|
|
|
3,261,137
|
|
Balance as of December 31, 2018
|
|
$
|
9,360,204
|
|
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:
|
|
12/31/2018
|
|
12/31/2017
|
Risk free interest rate
|
|
2.48% - 2.63%
|
|
1.55% - 1.98%
|
Stock volatility factor
|
|
136.0% - 396.0%
|
|
87.0% - 95.0%
|
Weighted average expected option life
|
|
6 months - 5 years
|
|
6 months - 5 years
|
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.
Marketable Securities
The Company adopted ASU 2016-01,
“Financial Instruments – Recognition and Measurement of Financial Assets and Financial Liabilities.” ASU 2016-01
requires investments (except those accounted for under the equity method of accounting, or those that result in consolidation of
the investee) to be measured at fair value with changes in fair value recognized in net income. It requires public business entities
to use the exit price notion when measuring the fair value of financial instruments for disclosure purpose, and separate presentation
of financial assets and financial liabilities by measurement category and form of financial asset. It eliminates the requirement
for public business entities to disclose the method(s) and significant assumptions used to estimate the fair value that is required
to be disclosed for financial instruments measured at amortized cost. The Company has evaluated the potential impact this standard
may have on the condensed consolidated financial statements and determined that it had a significant impact on the condensed consolidated
financial statements. The Company accounts for its investment in Water Technologies International, Inc. as available-for-sale securities,
and the unrealized gain on the available-for-sale securities is recognized in net income.
Licensing agreement
The Company analyzed the licensing
agreement using ASU 606 to determine the timing of revenue recognition. The licensing of the intellectual property (IP) is distinct
from the non-license goods or services and has significant standalone functionality that provides a benefit or value. The functionality
will not change during the license period due to the licensor’s activities. Because the significant standalone functionality
is delivered immediately, the revenue is generally recognized when the license is delivered.
Recently Issued Accounting Pronouncements
In February 2016, the FASB issued
ASU No. 2016-2, which creates ASC Topic 842, “Leases.” This update increases transparency and comparability among organizations
by recognizing lease assets and lease liabilities on the balance sheet and disclosing key information about leasing arrangements.
This guidance is effective for interim and annual reporting periods beginning after December 15, 2018. We are evaluating what impact,
if any, the adoption of this guidance will have on our financial condition, results of operations, cash flows or financial disclosures.
In August 2017, FASB issued
accounting standards update ASU-2017-12, “D” (Topic 815) – “Targeted Improvements to Accounting for Hedging
Activities”, to require an entity to present the earnings effect of the hedging instrument in the same statement line item
in which the earnings effect of the hedged item is reported. The amendments in this update are effective for fiscal years beginning
after December 15, 2018, and interim periods within those fiscal years. For all other entities, the amendments are effective for
fiscal years beginning after December 15, 2019, and interim periods with the fiscal years beginning after December 15, 2020. Early
adoption is permitted in any interim period after issuance of the update. The Company is currently evaluating the impact of the
adoption of ASU 2017-12 on the Company’s financial statements.
ORIGINCLEAR, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- AUDITED
DECEMBER 31, 2018 AND 2017
|
2.
|
SUMMARY OF SIGNIFICANT ACCOUNTING POLICES (Continued)
|
Recently Issued Accounting Pronouncements
(Continued)
In June 2018, FASB issued accounting
standards update ASU 2018-07, (Topic 505) – “Shared-Based Payment Arrangements with Nonemployees”, which simplifies
the accounting for share-based payments granted to nonemployees for goods and services. Under the ASU, most of the guidance on
such payments to nonemployees will be aligned with the requirements for share-based payments granted to employees. Under the ASU
2018-07, the measurement of equity-classified nonemployee share-based payments will be fixed on the grant date, as defined in ASC
718, and will use the term nonemployee vesting period, rather than requisite service period. The amendments in this update are
effective for fiscal years beginning after December 15, 2018, including interim periods within those fiscal years. For all other
entities, the amendments are effective for fiscal years beginning after December 15, 2019, and interim periods within fiscal years
beginning after December 15, 2020. Early adoption is permitted if financial statements have not yet been issued. The Company is
currently evaluating the impact of the adoption of ASU 2018-07 on the Company’s financial statements.
Management reviewed currently
issued pronouncements and does not believe that any other recently issued, but not yet effective, accounting standards, if currently
adopted, would have a material effect on the accompanying condensed financial statements.
Preferred Stock
Series B
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 consists 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 is to be adjusted to reflect the lower of $1.05 or the price of the Company’s
Common Stock calculated using the average closing prices of the Company’s Common Stock on the last three (3) trading days
prior to the date of conversion, provided, however, if the Average Closing Price is less than $0.35 per share, the adjusted conversion
price shall be $0.35 per share.
The 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 $1.05 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, 2018, the Company issued 476,143 shares of common stock upon conversion of 3,333 shares of preferred stock at a price of $1.05
per share, plus 952,286 make good shares at a price of $0.35 per share. As of December 31, 2018, all shares of Series B were converted.
Series C
On March 14, 2017, the Board
of Directors authorized the issuance of 1,000 shares of Series C preferred stock, par value $0.0001 per share, to T. Riggs Eckelberry
in exchange for his continued employment with the Company. The purchase price of the Series C preferred stock was $0.0001 per share
representing a total purchase price of $0.10 for 1,000 shares. As of December 31, 2018, there are 1,000 shares of Series C preferred
stock outstanding.
Series D
On April 13, 2018, the Board adopted
resolutions creating a series of shares of convertible preferred stock designated as 0% Series D preferred stock (the “Series
D preferred stock”) with a par value of $0.0001. The shares of Series D preferred stock do not have a dividend rate or liquidation
preference and do not carry any voting rights. The purchase price shall be $0.02 per unit for an aggregate investment amount of
less than $50,000; $0.018 for an aggregate amount of $50,000 or greater, but less than $100,000; $0.016 for an aggregate amount
of $100,000 or greater, but less than $250,000; $0.014 for an aggregate amount of $250,000 or greater. At no time may all or a
portion of the Series D preferred stock be converted if the number of shares of common stock to be issued pursuant to such conversion
would exceed, when aggregated with all other shares of common stock owned by the holder at such time, the number of shares of
common stock that would result in the holder beneficially owning (as determined in accordance with Section 13(d) of the Exchange
Act and the rules thereunder) more than 4.99% of all of the common stock outstanding at such time, which amount may be increased
to 9.99% at the holders discretion.
As of June 30, 2018, the Company
issued 15,805,554 shares of Series D preferred stock through a private placement for a cash value of $280,000 at prices ranging
$0.016 to $0.020. During the period ended September 30, 2018, the Series D shares were exchanged for 1,400,000 Series E preferred
stock. As of December 31, 2018, there were no outstanding Series D preferred stock.
ORIGINCLEAR, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- AUDITED
DECEMBER 31, 2018 AND 2017
|
3.
|
CAPITAL STOCK (Continued)
|
Preferred Stock
(Continued)
Series D-1
On
April 13, 2018, the Company filed a Certificate of Designation for its Series D-1 Convertible preferred stock (the “Series
D-1 preferred stock”) with the Secretary of State of Nevada designating 50,000,000 shares of its authorized preferred stock
as Series D-1 preferred stock. The shares of Series D-1 preferred stock have a par value of $0.0001 per share. The shares of Series
D-1 preferred stock do not have a dividend rate or liquidation preference. Each share of Series D-1 preferred stock is convertible
into one share of common stock. The shares of Series D-1 preferred stock do not carry any voting rights. At no time may all or
a portion of the Series D-1 preferred stock be converted if the number of shares of common stock to be issued pursuant to such
conversion would exceed, when aggregated with all other shares of common stock owned by the holder at such time, the number of
shares of common stock that would result in the holder beneficially owning (as determined in accordance with Section 13(d) of the
Exchange Act and the rules thereunder) more than 4.99% of all of the common stock outstanding at such time, which amount may be
increased to 9.99% at the holders discretion. The Company issued 38,500,000 preferred shares for services. As of December 31, 2018,
there were 38,500,000 shares issued and outstanding.
Series E
On
August 14, 2018, the Company filed a Certificate of Designation for its 0% Series E Convertible preferred stock (the “Series
E preferred stock”) with the Secretary of State of Nevada designating 4,000,000 shares of its authorized preferred stock
as Series E preferred stock, accompanied with one hundred (100) warrants each for the purchase of one (1) share of common stock.
The shares of Series E preferred stock have a par value of $0.0001 per share. The shares of Series E preferred stock do not have
a dividend rate or liquidation preference. Each share of Series E preferred stock is convertible into one share of common stock.
The shares of Series E preferred stock do not carry any voting rights. At no time may all or a portion of the Series E preferred
stock be converted if the number of shares of common stock to be issued pursuant to such conversion would exceed, when aggregated
with all other shares of common stock owned by the holder at such time, the number of shares of common stock that would result
in the holder beneficially owning (as determined in accordance with Section 13(d) of the Exchange Act and the rules thereunder)
more than 4.99% of all of the common stock outstanding at such time, which amount may be increased to 9.99% at the holders discretion.
On August 14, 2018, the Company sold 1,040,871 shares of Series E preferred stock for $227,098. Also, on August 14, 2018, the Series
D shares were cancelled and exchanged for 1,400,000 shares of Series E, for a total aggregate of 2,440,871 shares of Series E preferred
stock. On December 27, 2018, the Company issued 30,122,200 shares of common upon conversion from Series E to common shares. As
of December 31, 2018, there were 2,139,649 shares issued and outstanding.
Series F
On August
14, 2018, the Company filed a Certificate of Designation for its Series F Convertible preferred stock (the “Series F preferred
stock”) with the Secretary of State of Nevada designating $2,000,000 units, with each unit consisting of 100 shares of the
Company’s Series F preferred stock. The shares of Series F preferred stock have a par value of $0.0001 per share. The shares
of Series F preferred stock do not have a liquidation preference. Each share of Series F preferred stock is convertible into one
share of common stock. The shares of Series F preferred stock do not carry any voting rights. The Company may, in its sole discretion,
at any time while the Series F preferred stock is outstanding, redeem all or any portion of the outstanding Series preferred stock
at a price equal to the stated value, plus any accrued but unpaid dividends. The Company may exercise such redemption right by
providing a minimum of 5 days written notice of such redemption to the Holders. In the event the Company exercises such redemption
right for less than all of the then-outstanding shares of Series F preferred stock, the Company shall redeem the outstanding shares
of the Holders of a pro-rata basis. The Series F is mandatorily redeemable on September 1, 2020. At no time may all or a portion
of the Series F preferred stock be converted if the number of shares of common stock to be issued pursuant to such conversion
would exceed, when aggregated with all other shares of common stock owned by the holder at such time, the number of shares of
common stock that would result in the holder beneficially owning (as determined in accordance with Section 13(d) of the Exchange
Act and the rules thereunder) more than 4.99% of all of the common stock outstanding at such time, which amount may be increased
to 9.99% at the holders discretion. As of December 31, 2018, the Company accrued dividends in the amount of $27,017. As of December
31, 2018, there were 1,743 shares of Series F preferred stock issued and outstanding.
Common Stock
On August 9, 2018, the Company
and Board of Directors increased the aggregate number of authorized shares of common stock of the Corporation to 8,000,000,000
shares from 2,000,000,000 shares.
ORIGINCLEAR, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- AUDITED
DECEMBER 31, 2018 AND 2017
|
3.
|
CAPITAL STOCK (Continued)
|
Year ended December 31, 2018
The Company issued 914,376,002
shares of common stock for the settlement of convertible promissory notes in an aggregate principal in the amount of $840,138,
plus interest in the amount of $125,409, with an aggregate fair value loss on conversion of debt in the amount of $1,849,979, based
upon conversion prices of $0.0014 to $0.0329.
The
Company issued 259,859,073 shares of common stock for services at fair value of $1,207,232.
The
Company issued 431,812,575 shares of common stock through a private placement for purchase of Series F preferred stock.
The
Company issued 1,428,429 shares of common stock upon conversion of 3,333 Series B preferred stock.
The
Company issued 30,122,200 shares of common stock upon conversion of 301,222 Series E preferred stock.
Year ended December 31,
2017
The Company issued 25,055,362
shares of common stock through a private placement at an average price of $0.066 per share for cash in the amount of $1,654,741.
The Company issued 15,675,714
shares of common stock for the settlement of convertible promissory notes in an aggregate principal in the amount of $469,000,
plus interest in the amount of $130,364, with a fair value loss of $861,739 based upon conversion prices of $0.031 up to $0.21.
The Company issued 886,700 shares
of common stock for the settlement of accounts payable with a fair value of $117,931, which includes a fair value loss on settlement
of $27,931.
The Company issued 49,366,591
shares of common stock for services at fair value of $3,875,479.
Options
The Board of Directors adopted
Equity Incentive Stock Option Plans for the purposes of granting stock options to its employees and others providing services to
the Company. The Options granted under these plans may be either incentive options or nonqualified options and shall
be administered by the Company’s Board of Directors.
During the year ended December
31, 2018, the Company entered into option cancellation agreements between the Company and option holders. The options were terminated
in full effective December 26, 2018.
A summary of the Company’s
stock option activity and related information follows:
|
|
December
31, 2018
|
|
|
December
31,2017
|
|
|
|
|
|
|
Weighted
|
|
|
|
|
|
Weighted
|
|
|
|
|
|
|
average
|
|
|
|
|
|
average
|
|
|
|
Number of
|
|
|
exercise
|
|
|
Number of
|
|
|
exercise
|
|
|
|
Options
|
|
|
price
|
|
|
Options
|
|
|
price
|
|
Outstanding, beginning of
year
|
|
|
3,697,495
|
|
|
$
|
1.51
|
|
|
|
3,697,495
|
|
|
$
|
1.51
|
|
Granted
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Exercised
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Forfeited/Expired
|
|
|
(3,697,495
|
)
|
|
$
|
0.91
|
|
|
|
-
|
|
|
$
|
1.51
|
|
Outstanding, end
of year
|
|
|
-
|
|
|
|
-
|
|
|
|
3,697,495
|
|
|
|
1.51
|
|
Exercisable at
the end of the year
|
|
|
-
|
|
|
|
-
|
|
|
|
2,682,644
|
|
|
|
1.03
|
|
ORIGINCLEAR, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- AUDITED
DECEMBER 31, 2018 AND 2017
|
4.
|
OPTIONS AND WARRANTS (Continued)
|
Options
(Continued)
The weighted average remaining
contractual life of options outstanding issued under the option plans as of December 31, 2018 and 2017 was as follows:
December 31, 2018
|
|
|
December 31, 2017
|
|
|
|
|
|
|
|
|
|
|
Weighted
|
|
|
|
|
|
|
|
|
|
|
|
Weighted
|
|
|
|
|
|
|
|
|
|
|
Average
|
|
|
|
|
|
|
|
|
|
|
|
Average
|
|
|
|
|
Stock
|
|
|
Stock
|
|
|
Remaining
|
|
|
|
|
|
Stock
|
|
|
Stock
|
|
|
Remaining
|
|
Exercisable
|
|
|
Options
|
|
|
Options
|
|
|
Contractual
|
|
|
Exercisable
|
|
|
Options
|
|
|
Options
|
|
|
Contractual
|
|
Prices
|
|
|
Outstanding
|
|
|
Exercisable
|
|
|
Life (years)
|
|
|
Prices
|
|
|
Outstanding
|
|
|
Exercisable
|
|
|
Life (years)
|
|
|
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
$
|
6.65-31.15
|
|
|
|
52,276
|
|
|
|
50,401
|
|
|
|
4.59 - 6.77
|
|
|
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
$
|
14.35-15.40
|
|
|
|
32,362
|
|
|
|
32,362
|
|
|
|
5.71
|
|
|
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
$
|
1.31
|
|
|
|
3,612,857
|
|
|
|
2,599,881
|
|
|
|
2.77 - 3.80
|
|
|
|
|
|
|
-
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
|
3,697,495
|
|
|
|
2,682,644
|
|
|
|
|
|
The Company recognized stock-based
compensation expense in the financial statements of operations during the year ended December 31, 2018 and 2017 of $50,897 and
$89,476.
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 1,714,286 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 857,143 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 857,143
shares of its common stock. The Company has not recognized any costs associated with the milestones, due to not being able to estimate
the probability of it being achieved. As the performance goals are achieved, the shares shall become eligible for vesting and issuance.
On August 10, 2016, the Company entered
into a Restricted Stock Grant Agreement (“the August RSGA”) with its Chief Executive Officer, Riggs Eckelberry, to
create management incentives to improve the economic performance of the Company and to increase its value and stock price. All
shares issuable under the August RSGA are performance based shares and none have yet vested nor have any been issued. The August
RSGA provides for the issuance of up to 1,714,286 shares of the Company’s common stock to the CEO provided certain milestones
are met in certain stages; a) If the Company’s consolidated gross revenue, calculated in accordance with generally accepted
accounting principles, consistently applied, equals or exceeds $15,000,000 for the trailing twelve month period, the Company will
issue up to 857,143 shares of its common stock; 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 857,143 shares of its common stock. The Company has not recognized
any costs associated with the milestones, due to not being able to estimate the probability of it being achieved. As the performance
goals are achieved, the shares shall become eligible for vesting and issuance.
ORIGINCLEAR, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- AUDITED
DECEMBER 31, 2018 AND 2017
|
4.
|
OPTIONS AND WARRANTS
(Continued)
|
Restricted Stock to Employees and Consultants
On May 12, 2016, the Company entered
into a Restricted Stock Grant Agreement (“the First Employee RSGA”) with an employee, to create management incentives
to improve the economic performance of the Company and to increase its value and stock price. All shares issuable under the First
Employee RSGA are performance based shares and none have yet vested nor have any been issued. The First Employee RSGA provides
for the issuance of up to 857,143 shares of the Company’s common stock to the 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 428,571 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 428,571
shares of its common stock. The Company has not recognized any costs associated with the milestones, due to not being able to estimate
the probability of it being achieved. As the performance goals are achieved, the shares shall become eligible for vesting and issuance.
On May 12, 2016, the Company entered
into a Restricted Stock Grant Agreement (“the Second Employee RSGA”) with an employee, to create management incentives
to improve the economic performance of the Company and to increase its value and stock price. All shares issuable under the Second
Employee RSGA are performance based shares and none have yet vested nor have any been issued. The Second Employee RSGA provides
for the issuance of up to 571,429 shares of the Company’s common stock to the Employee provided certain milestones are met
in certain stages; a) If the Company’s consolidated gross revenue, calculated in accordance with generally accepted accounting
principles, consistently applied, equals or exceeds $15,000,000 for the trailing twelve month period as reported in the Company’s
quarterly or annual financial statements, the Company will issue up to 285,714 shares of its common stock; b) If the Company’s
consolidated operating profit (
Operating Profit = Operating Revenue - Cost of Goods Sold - Operating Expenses - Depreciation
& Amortization),
calculated in accordance with generally accepted accounting principles, equals or exceeds $1,500,000 for
the trailing twelve month period as reported as reported in the Company’s SEC Reports, the Company will issue up to 285,714
shares of its common stock. The Company has not recognized any costs associated with the milestones, due to not being able to estimate
the probability of it being achieved. As the performance goals are achieved, the shares shall become eligible for vesting and issuance.
On August 10, 2016, the Company
entered into a Restricted Stock Grant Agreement (“the Consultants RSGA”) with two of its’ consultants, to
create management incentives to improve the economic performance of the Company and to increase its value and stock price.
All shares issuable under the Consultants RSGA are performance based shares and none have yet vested nor have any been
issued. The Consultants RSGA provides to each of the consultants the issuance of up to 285,714 shares of the Company’s
common stock provided certain milestones are met in certain stages; a) If the Company’s consolidated gross revenue,
calculated in accordance with generally accepted accounting principles, consistently applied, equals or exceeds $15,000,000
for the trailing twelve month period, the Company will issue to each of the consultants up to 142,857 shares of its common
stock; b) If the Company’s consolidated operating profit (
Operating Profit = Operating Revenue - Cost of Goods Sold
- Operating Expenses - Depreciation & Amortization),
calculated in accordance with generally accepted accounting
principles, equals or exceeds $1,500,000 for the trailing twelve-month period as reported as reported in the Company’s
SEC Reports, the Company will issue up to 142,857 shares 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 years ended December
31, 2018 and 2017, 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, 2018 and 2017:
|
|
December 31, 2018
|
|
|
December 31, 2017
|
|
|
|
|
|
|
Weighted
|
|
|
|
|
|
Weighted
|
|
|
|
Number
|
|
|
average
|
|
|
Number
|
|
|
average
|
|
|
|
of
|
|
|
exercise
|
|
|
of
|
|
|
exercise
|
|
|
|
Warrants
|
|
|
price
|
|
|
Warrants
|
|
|
price
|
|
Outstanding - beginning of year
|
|
|
53,562,961
|
|
|
$
|
5.40
|
|
|
|
506,026
|
|
|
$
|
6.30
|
|
Granted
|
|
|
244,087,101
|
|
|
$
|
-
|
|
|
|
53,090,625
|
|
|
$
|
-
|
|
Exercised
|
|
|
-
|
|
|
$
|
-
|
|
|
|
-
|
|
|
$
|
-
|
|
Forfeited
|
|
|
(46,738,037
|
)
|
|
$
|
0.09
|
|
|
|
(33,690
|
)
|
|
$
|
23.93
|
|
Outstanding - end of year
|
|
|
250,912,025
|
|
|
$
|
5.40
|
|
|
|
53,562,961
|
|
|
$
|
5.40
|
|
ORIGINCLEAR, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- AUDITED
DECEMBER 31, 2018 AND 2017
|
4.
|
OPTIONS AND WARRANTS (Continued)
|
Warrants
(Continued)
At December 31, 2018 and 2017, the weighted
average remaining contractual life of warrants outstanding:
|
|
|
December 31, 2018
|
|
|
December 31, 2017
|
|
|
|
|
|
|
|
|
|
|
Weighted
|
|
|
|
|
|
|
|
|
Weighted
|
|
|
|
|
|
|
|
|
|
|
Average
|
|
|
|
|
|
|
|
|
Average
|
|
|
|
|
|
|
|
|
|
|
Remaining
|
|
|
|
|
|
|
|
|
Remaining
|
|
Exercisable
|
|
|
Warrants
|
|
|
Warrants
|
|
|
Contractual
|
|
|
Warrants
|
|
|
Warrants
|
|
|
Contractual
|
|
Prices
|
|
|
|
Outstanding
|
|
|
|
Exercisable
|
|
|
|
Life (years)
|
|
|
|
Outstanding
|
|
|
|
Exercisable
|
|
|
|
Life (years)
|
|
$
|
0.080
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
53,547,769
|
|
|
|
53,547,769
|
|
|
|
0.24 - 1.42
|
|
$
|
0.012
|
|
|
|
6,824,924
|
|
|
|
6,824,924
|
|
|
|
0.42
|
|
|
|
12,334
|
|
|
|
12,334
|
|
|
|
0.07 - 1.47
|
|
$
|
0.250
|
|
|
|
244,087,101
|
|
|
|
244,087,101
|
|
|
|
2.62
|
|
|
|
2,858
|
|
|
|
2,858
|
|
|
|
5.88
|
|
|
|
|
|
|
250,912,025
|
|
|
|
250,912,025
|
|
|
|
|
|
|
|
53,562,961
|
|
|
|
53,562,961
|
|
|
|
|
|
At December 31, 2018, the aggregate
intrinsic value of the warrants outstanding was $0.
|
5.
|
CONVERTIBLE PROMISSORY NOTES
|
As of December 31, 2018 and
2017, the outstanding convertible promissory notes are summarized as follows:
Convertible Promissory Notes, net of debt discount
|
|
$
|
3,657,427
|
|
Less current portion
|
|
|
1,580,955
|
|
Total long-term liabilities
|
|
$
|
2,076,472
|
|
Maturities of long-term debt
for the next five years are as follows:
Year Ending December 31,
|
|
Amount
|
|
2019
|
|
|
1,580,955
|
|
2020
|
|
|
1,815,000
|
|
2021
|
|
|
125,000
|
|
2022
|
|
|
-
|
|
2023
|
|
|
136,471
|
|
|
|
$
|
3,657,427
|
|
At December 31, 2018, the $3,803,431
in convertible promissory notes has a remaining debt discount of $146,005, leaving a net balance of $3,657,427.
On various dates from 2014 through
May, 2015, the Company issued unsecured convertible promissory notes (the “2014-2015 Notes”), that matured on various
dates and were extended sixty (60) months from the effective date of each Note. The 2014-2015 Notes bear interest at 10% per annum.
The 2014-2015 Notes may be converted into shares of the Company’s common stock at conversion prices ranging from the lesser
of $2.10 to $4.90 (subject to adjustment for stock splits, dividends, combinations and other similar transactions) or 50% of the
lowest trade price on any trade day following issuance of the 2014-2015 Notes. In addition, for as long as the 2014-2015
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 2014-2015 Notes or such other convertible notes or a term was not similarly provided
to the purchaser of the 2014-2015 Notes or such other convertible notes, then such more favorable or additional term shall, at
the purchaser’s option, become part of the 2014-2015 Notes and such other convertible notes. The conversion feature of the
2014-2015 Notes was considered a derivative in accordance with current accounting guidelines because of the reset conversion features
of the 2014-2015 Notes. During the year ended December 31, 2018, the Company issued 257,596,986 shares of common stock, upon conversion
of $206,700 in principal, plus accrued interest of $79,245, with a fair value loss on settlement of $630,236. As of December 31,
2018, the 2014-2015 Notes had an aggregate remaining balance of $1,279,300.
The unsecured convertible promissory
notes (the “OID Notes”) had an aggregate remaining balance of $184,124, plus accrued interest of $13,334. The OID Notes
included an original issue discount and one-time interest, which has been fully amortized. The OID Notes matured on December 31,
2017, which were extended to June 30, 2018. The OID Notes were convertible into shares of the Company’s common stock at a
conversion price initially of $15.31. After the amendment, the conversion price changed to the lesser of $2.80 per share, or b)
fifty percent (50%) of the lowest trade price of common stock recorded since the original effective date of this note, or c) the
lowest effective price per share granted to any person or entity after the effective date. The conversion feature of the
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, 2018, the Company issued 98,600,000 shares of common stock upon conversion of principal
in the amount of $47,563, plus accrued interest of $6,667, with a fair value loss of $201,670. The remaining balance as of December
31, 2018, was $143,138 which includes interest of $6,667.
ORIGINCLEAR, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- AUDITED
DECEMBER 31, 2018 AND 2017
|
5.
|
CONVERTIBLE PROMISSORY NOTES (Continued)
|
The Company issued various,
unsecured convertible promissory notes (the “2015-2016 Notes”), on various dates ending on May 19, 2016. The 2015-2016
Notes matured and were extended from the date of each tranche through maturity dates ending on May 19, 2020. The 2015-2016 Notes
bear interest at 10% per annum. The 2015-2016 Notes may be converted into shares of the Company’s common stock at conversion
prices ranging from the lesser of $0.70 to $2.80 (subject to adjustment for stock splits, dividends, combinations and other similar
transactions) or 50% of the lowest trade price on any trade day following issuance of the 2015-2016 Notes. The conversion
feature of the 2015-2016 Notes was considered a derivative in accordance with current accounting guidelines because of the reset
conversion features of the 2015-2016 Notes. The remaining balance of the 2015-2016 Notes as of December 31, 2018, was $1,325,000.
The Company issued a convertible
note (the “Dec 2015 Note”) in exchange for accounts payable in the amount of $432,048, which could be converted into
shares of the Company’s common stock after December 31, 2015. The Dec 2015 Note was accounted for under ASC 470, whereby,
a beneficial conversion feature was recorded at time of issuance. The Dec 2015 Note did not meet the criteria of a derivative,
and was accounted for as a beneficial conversion feature, which was amortized over the life of the Dec 2015 Note and recognized
as interest expense in the financial statements. On January 1, 2016, the Dec 2015 Note met the criteria of a derivative and was
accounted for under ASC 815. The Dec 2015 Note has zero stated interest rate, and the conversion price shall be equal to 75% of
the average three lowest last sale prices traded during the 25 trading days immediately prior to conversion. As of December 31,
2018, the remaining balance on the Dec 2015 Note was $167,048.
The Company issued a convertible
note (the “Sep 2016 Note”) in exchange for accounts payable in the amount of $430,896, which could be converted into
shares of the Company’s common stock after September 15, 2016. The Sep 2016 Note was accounted for under ASC 470, whereby,
a beneficial conversion feature was recorded at time of issuance. The Sep 2016 Note met the criteria of a derivative and was accounted
for under ASC 815. The Sep 2016 Note has zero stated interest rate, and the conversion price shall be equal to 75% of the average
three lowest last sale prices traded during the 25 trading days immediately prior to conversion. The Sep 2016 Note did not meet
the criteria of a derivative at the date of the issuance, and was accounted for as a beneficial conversion feature, which was amortized
over the life of the Sep 2016 Note and recognized as interest expense in the financial statements. The conversion feature of the
Sep 2016 Note was considered a derivative in accordance with current accounting guidelines because of the reset conversion feature
of the Sep 2016 Note. The Company recorded amortization of debt discount, which was recognized as interest expense in the amount
of $187,906 during the year ended December 31, 2018. As of December 31, 2018, the remaining balance on the Sep 2016 Note was $430,896.
The Company issued an unsecured
convertible promissory note (the “Dec 20 Note”), in the amount of $150,000 on December 20, 2017. The Dec 20 Note matures
on December 20, 2018. The Dec 20 Note bears interest at 10% per annum. The Dec 20 Note may be converted into shares of the Company’s
common stock at a conversion price of the lesser of $0.05 per share or 50% of the lowest trade price during the twenty trading
days immediately before the conversion. The conversion feature of the Dec 20 Note was considered a derivative in accordance with
current accounting guidelines because of the reset conversion features of the Dec 20 Note. During the year ended the Company issued
117,677,432 shares of common stock, upon conversion of principal in the amount of $150,000, plus accrued interest of $10,149, with
a fair value loss on settlement of $245,496. The Company recorded amortization of debt discount, which was recognized as interest
expense in the amount of $43,820 during the year ended December 31, 2018. As of December 31, 2018, the Dec 20 Note was fully
converted.
The Company issued an unsecured
convertible promissory note (the “Dec 22 Note”), in the amount of $75,000 on December 22, 2017. The Dec 22 Note matures
on December 22, 2018. The Dec 22 Note bears interest at 10% per annum. The Dec 22 Note may be converted into shares of the Company’s
common stock at a conversion price of the lesser of $0.05 per share or 50% of the lowest trade price during the twenty trading
days upon default of the prepayment date. The conversion feature of the Dec 22 Note was considered a derivative in accordance with
current accounting guidelines because of the reset conversion features of the Dec 22 Note. During the year ended the Company issued
57,575,291 shares of common stock, upon conversion of principal in the amount of $5,044, with a fair value loss on settlement of
$99,987. The Company recorded amortization of debt discount, which was recognized as interest expense in the amount of $8,410 during
the year ended December 31, 2018. As of December 31, 2018, the Dec 22 Note was fully converted.
The Company issued various unsecured
convertible promissory notes (the “Jan-Aug 2018 Notes”), in the aggregate amount of $293,000 on various dates from
January 24, 2018 thru August 28, 2018. The Jan-Aug 2018 Notes matures on dates from January 24, 2018 thru August 28, 2019. The
Jan-Aug 2018 Notes bear interest at 10% per annum. The Jan-Aug 2018 Notes may be converted into shares of the Company’s common
stock at a variable conversion price of 61% of the lowest one (1) trading day during the ten (10) trading days prior to conversion.
The conversion feature of the Jan-Aug 2018 Notes was considered a derivative in accordance with current accounting guidelines because
of the reset conversion features of the Jan-Aug 2018 Notes. During the year ended the Company issued 147,383,053 shares of common
stock, upon conversion of principal in the amount of $212,000, plus accrued interest of $10,600, with a fair value loss on settlement
of $243,183. The Company recorded amortization of debt discount, which was recognized as interest expense in the amount of $241,928
during the year ended December 31, 2018. As of December 31, 2018, the balance remaining on the Jan-Aug 2018 Notes was $81,000.
ORIGINCLEAR, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- AUDITED
DECEMBER 31, 2018 AND 2017
|
5.
|
CONVERTIBLE PROMISSORY NOTES (Continued)
|
The Company issued (2) unsecured
convertible promissory notes (the “Feb 2018 Notes”), in the aggregate principal amount of $157,500 (each in the amount
of $78,750) on February 23, 2018. The Feb 2018 Notes matures on February 23, 2019, and bear interest at 10% per annum. The first
of the two Feb 2018 Notes shall be paid for by the Buyer. The second of the two Feb 2018 Notes shall initially be paid for by the
issuance of an offsetting $78,750 secured note issued to the Company by the Buyer. The first of the two notes was funded with cash
and the Company must agree to the funding of the second of the two Feb 2018 Notes, before it can be funded with cash. The second
of the two Feb 2018 Notes is secured by assets of the Buyer having a fair market value of at least $78,750. The second of the Feb
2018 Notes was issued on August 23, 2018 in the amount of $78,750. The second of the Feb 2018 Notes may be converted into shares
of the Company’s common stock at a conversion price of $0.03 or 50% discount of the lowest trading price during the twenty
(20) trading days prior to conversion. The conversion feature of the Feb 2018 Notes was considered a derivative in accordance with
current accounting guidelines because of the reset conversion features of the Feb 2018 Notes. During the year ended December 31,
2018, the Company issued 176,743,238 shares of common stock, upon conversion of principal in the amount of $116,950, plus accrued
interest of $5,438, with a fair value loss on settlement of $373,896. The Company recorded amortization of debt discount, which
was recognized as interest expense in the amount of $71,159 during the year ended December 31, 2018. As of December 31, 2018,
the balance remaining on the Feb 2018 Notes was $40,550.
The Company issued various unsecured
convertible promissory notes (the “Apr & May 2018 Notes”), in the aggregate amount of $300,000 on various dates
of April 2, 2018 and May 31, 2018. The Apr & May 2018 Notes matures on dates of April 2, 2019 and May 31, 2019. The Apr &
May 2018 Notes bear interest at 10% per annum. The Apr & May 2018 Notes may be converted into shares of the Company’s
common stock at a variable conversion price of 50% of the lesser of the lowest trading price twenty-five (25) trading days prior
to conversion. The conversion feature of the Apr & May 2018 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, 2018, the Company issued 58,800,000
shares of common stock upon conversion of $31,835 in principal, plus accrued interest of $8,266, with a fair value loss on settlement
of $55,600. The Company recorded amortization of debt discount, which was recognized as interest expense in the amount of $107,080
during the year ended December 31, 2018. As of December 31, 2018, the remaining balance on the Apr & May 2018 Notes were
$268,165.
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, 2018 was $9,360,204.
6.
|
REVENUE FROM CONTRACTS WITH CUSTOMERS
|
Equipment Contracts
Revenues and related costs on
equipment contracts are recognized as the performance obligations for work are satisfied over time in accordance with Accounting
Standards Codification (“ASC”) 606, Revenue from Contracts with Customers. Under ASC 606, revenue and associated profit,
will be recognized as the customer obtains control of the goods and services promised in the contract (i.e., performance obligations).
All un-allocable indirect costs and corporate general and administrative costs are charged to the periods as incurred. However,
in the event a loss on a contract is foreseen, the Company will recognize the loss as it is determined.
The following table represents
a disaggregation of revenue by type of good or service from contracts with customers for the year ended December 31, 2018 and 2017.
|
|
Years Ended
|
|
|
|
December 31, 2018
|
|
|
|
2018
|
|
|
2017
|
|
Equipment Contracts
|
|
$
|
3,248,939
|
|
|
$
|
1,811,708
|
|
Component Sales
|
|
|
1,187,507
|
|
|
|
1,300,784
|
|
Services Sales
|
|
|
125,645
|
|
|
|
243,140
|
|
Licensing Fees
|
|
|
75,607
|
|
|
|
-
|
|
|
|
$
|
4,637,698
|
|
|
$
|
3,355,632
|
|
ORIGINCLEAR, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- AUDITED
DECEMBER 31, 2018 AND 2017
6.
|
REVENUE FROM CONTRACTS WITH CUSTOMERS (Continued)
|
Equipment Contracts
(Continued)
Revenue recognition for other
sales arrangements, such as sales for components, service and licensing fees will remain materially consistent.
Contract assets represents revenues
recognized in excess of amounts billed on contracts in progress. Contract liabilities represents billings in excess of revenues
recognized on contracts in progress. Assets and liabilities related to long-term contracts are included in current assets and current
liabilities in the accompanying balance sheets, as they will be liquidated in the normal course of the contract completion. The
contract asset for the years ending December 31, 2018 and 2017, was $111,001 and $88,589, respectively. The contract liability
for the years ended December 31, 2018 and 2017, was $112,894 and $154,048.
During the year ended December
31, 2018, Progressive Water Treatment a wholly-owned subsidiary of OriginClear, Inc., acquired a new division, which offers a unique
product line of prefabricated water treatment systems. The Company has contracted with Modern Water System to commercialize his
inventions.
7.
|
FINANCIAL ASSETS
Convertible Note Receivable
The Company purchased a 10% convertible
note in the amount of $80,000, through a private placement with Water Technologies International, Inc (“WTII”). The
Note is convertible into common stock of WTII at a price of 65% of the lowest trading price for the ten (10) trading days immediately
prior to the conversion date. The conversion price shall not be lower than a price of $0.0001 per share. As of December 31, 2018,
the note included principal of $80,000 plus accrued interest of $4,900.
Fair value investment in Securities
The Company purchased 10,000,000 shares
of WTII stock through a private placement for cash of $100,000. ASU 2016-01 requires equity investments to be measured at fair
value with changes in fair value recognized in net income. During the period the Company exchanged the shares for services in the
amount of $80,000, and recognized a loss of $20,000 in the statement of operations.
|
|
On May 15, 2018, the Company received 4,000 shares of WTII preferred stock for the use of OriginClear, Inc. technology associated with their proprietary electro water separation system. The stock was valued at fair market value of $0.0075 for a price of $30,000 on the date of issuance. The preferred shares are convertible into 4,000,000 shares of common stock. The Company analyzed the licensing agreement using ASU 606 to determine the timing of revenue recognition. The licensing of the intellectual property (IP) is distinct from the non-license goods or services and has significant standalone functionality that provides a benefit or value. The functionality will not change during the license period due to the licensor’s activities. Because the significant standalone functionality was delivered immediately, the revenue was recognized in the financial statements as of June 30, 2018. As of December 31, 2018, the fair value of the preferred shares was $22,800.
|
Secured Loans Payable
The Company entered into short
term loans with various lenders for capital expansion secured by the Company’s assets in the amount of $1,749,970, which
included finance cost of $624,810. The finance cost was amortized over the terms of the loans, which have various maturity dates
ranging from October 2018 through February 2019. The term of the loans ranged from two months to six months. The net balance as
of December 31, 2018 was $473,507, less the finance cost of $123,458.
Promissory Note Payable
The Company entered into a promissory
note payable on July 18, 2018 for the sum of $75,000. The principal consists of $67,500 plus a $7,500 origination fee. The interest
is sixty-nine percent per annum. The first payment of $6,330 is due September 1, 2018, and $4,318 thereafter. The maturity date
of the Note is August 1, 2028. The note is personally guaranteed by the Company’s CEO.
As of December 31, 2018, the
maturities are summarized as follows:
Promissory note payable
|
|
$
|
74,997
|
|
Less current portion
|
|
|
110
|
|
Long term portion
|
|
$
|
74,867
|
|
|
|
|
|
|
Long term maturities for the next five years are as follows:
|
|
|
|
|
|
|
|
|
|
2019
|
|
$
|
110
|
|
2020
|
|
|
214
|
|
2021
|
|
|
419
|
|
2022
|
|
|
820
|
|
2023 thru 2028
|
|
|
73,414
|
|
|
|
$
|
74,977
|
|
ORIGINCLEAR, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- AUDITED
DECEMBER 31, 2018 AND 2017
|
9.
|
LOANS PAYABLE – RELATED PARTY
|
The Company’s CEO loaned
the Company $248,870 during the year ended December 31, 2018. The loans bear interest at various rates to be repaid over a period
of three (3) years at various maturity dates. The funds were used for operating expenses. Principal payments were made in the amount
of $29,028, leaving a balance of $219,841 as of December 31, 2018.
The Company entered into a capital
lease for the purchase of equipment during the year ended December 31, 2018. The lease is for a sixty (60) month term, with monthly
payments of $757 per month, and a purchase option at the end of the lease for $1.00.
As of December 31, 2018, the
maturities are summarized as follows:
Capital lease
|
|
$
|
36,006
|
|
Less current portion
|
|
|
9,088
|
|
Total long-term liabilities
|
|
$
|
26,918
|
|
Long term maturities for the
next four years are as follows:
Period Ending December 31,
|
2019
|
|
$
|
9,088
|
|
2020
|
|
|
9,088
|
|
2021
|
|
|
9,088
|
|
2022
|
|
|
8,742
|
|
|
|
$
|
36,006
|
|
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 2015.
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, 2018 and 2017, 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, 2018 and 2017, the Company did not recognize interest and penalties.
At December
31, 2018, the Company had net operating loss carry-forwards of approximately $32,321,460, which expire at dates that have not been
determined. No tax benefit has been reported in the December 31, 2018 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, 2018 and 2017 due to the following:
|
|
2018
|
|
|
2017
|
|
Book loss
|
|
$
|
(2,388,460
|
)
|
|
$
|
(2,092,700
|
)
|
Tax to book differences for deductible expenses
|
|
|
11,280
|
|
|
|
14,740
|
|
Tax non deductible expenses
|
|
|
517,000
|
|
|
|
1,646,400
|
|
|
|
|
|
|
|
|
|
|
Valuation Allowance
|
|
|
1,860,180
|
|
|
|
431,560
|
|
|
|
|
|
|
|
|
|
|
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
- AUDITED
DECEMBER 31, 2018 AND 2017
|
11.
|
INCOME TAXES (Continued)
|
Net deferred
tax liabilities consist of the following components as of December 31,
|
|
2018
|
|
|
2017
|
|
Deferred tax assets:
|
|
|
|
|
|
|
NOL carryover
|
|
$
|
10,277,800
|
|
|
$
|
9,373,200
|
|
Other carryovers
|
|
|
704,420
|
|
|
|
397,000
|
|
|
|
|
|
|
|
|
|
|
Deferred tax liabilities:
|
|
|
|
|
|
|
|
|
Depreciation
|
|
|
(33,120
|
)
|
|
|
5,800
|
|
|
|
|
|
|
|
|
|
|
Less Valuation Allowance
|
|
|
(10,949,100
|
)
|
|
|
(9,776,000
|
)
|
|
|
|
|
|
|
|
|
|
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.
On
December 22, 2017, the U.S. government enacted comprehensive tax legislation commonly referred to as the Tax
Cut and Jobs Act (the “Tax Act”). The Tax Act establishes new tax laws that affects 2018 and future
years, including a reduction in the U.S. federal corporate income tax rate to 21%, effective January 1, 2018.
The Company
has applied the new tax law for its calculation of the deferred tax provision. There was no impact to the Company’s
financial statements. For certain deferred tax assets and deferred tax liabilities, we have recorded a provisional decrease of
$10,949,100, with a corresponding net adjustment to the valuation allowance of $10,949,100 as of January 1, 2018.
On December 31, 2014, the Company
formed a wholly owned subsidiary, OriginClear Technologies Limited (OCT), in Hong Kong, China. The Company granted OCT a master
license for the People’s Republic of China. In turn, OCT is expected to license regional joint ventures for water treatment.
13.
|
COMMITMENTS AND CONTINGENCIES
|
Operating Lease
The Company holds an agreement for office space located
in Los Angeles, California. The initial agreement was from May 1, 2016 to July 31, 2016 and the term has automatically renewed
for successive periods and will continue until terminated in accordance with the agreement.
Operating Lease – Related
Party
The Company holds 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, 2018.
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, 2018.
ORIGINCLEAR, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- AUDITED
DECEMBER 31, 2018 AND 2017
13.
|
COMMITMENTS AND CONTINGENCIES
(Continued)
|
Litigation
PowerUp Settlement
Agreement
As previously disclosed, on
June 7, 2018, the Company executed a convertible promissory note (the “June PowerUp Note”) in the amount of $43,000
in favor of PowerUp Lending Group Ltd. (“PowerUP”) and a second convertible promissory note dated August 28, 2018 in
the amount of $38,000 in favor of PowerUp (the “August PowerUp Note,” and together with the June PowerUp Note, the
“PowerUp Notes”). On November 19, 2018, the Company received notice from PowerUp that the Company was in default under
the PowerUp Notes due to a failure to timely file the Company’s Form 10-Q for the period ended September 30, 2018, resulting
in an acceleration of amounts due under the PowerUp Notes. PowerUp commenced an action against the Company and certain of its officers
in the Supreme Court of New York, County of Nassau (the “Action”). By Order dated December 1, 2018, the court in the
Action, among other things, directed the Company and its transfer agent to establish a share reserve for PowerUp’s benefit
in the amount of 633,934,425 shares of common stock. On January 30, 2019, the Company entered into a settlement agreement with
PowerUp, pursuant to which, in full and final settlement of all claims asserted by PowerUp against the Company related to the PowerUp
Notes, PowerUp elected to convert the PowerUp Notes, and upon the conversion of the PowerUp Notes (which the parties agreed to
an aggregate outstanding balance of $127,403), the Company issued to PowerUp shares of the Company’s common stock at the
conversion price of 61% of the Market Price (a 39% discount to Market Price) as defined in the PowerUp Notes). As of March 7, 2019,
all outstanding PowerUp Notes, have been fully converted and all remaining share reserves for PowerUp have been cancelled.
Auctus Settlement
Agreement
As previously disclosed, on
April 2, 2018, the Company entered into a securities purchase agreement (the “Auctus SPA”) with Auctus Fund, LLC (“Auctus”)
and in connection with the Auctus SPA issued a convertible promissory note to Auctus in the principal amount of $150,000 (the “Auctus
Note” and with the Auctus SPA, the “First Auctus Documents”). On May 31, 2018, the Company entered into a second
securities purchase agreement with Auctus (the “Second Auctus SPA”) and in connection with the Second Auctus SPA issued
a convertible promissory note in the principal amount of $150,000 to Auctus (the “Second Auctus Note” and with the
Second Auctus SPA, the “Second Auctus Documents” and, with the First Auctus Documents, the “Auctus Transaction
Documents”). Auctus alleged that the Company failed to allow Auctus to convert all or portions of the outstanding balance
represented by the Auctus Note and the Second Auctus Note (together, the “Auctus Notes”) into shares of common stock
of the Company, causing various events of default (“Auctus Events of Default”) by the Company under the Auctus SPA
and the Second Auctus SPA (together, the “Auctus Purchase Agreements”). On February 12, 2019, Auctus filed an action
in the United States District Court for the District of Massachusetts, styled as Auctus Fund, LLC v. OriginClear, Inc., No. 1:19-CV-10273-FDS
(D. Mass.)(Saylor, J.) (hereinafter the “Auctus Litigation”), alleged, inter alia, breaches of the Auctus Purchase
Agreements and the Auctus Notes. On March 13, 2019, the Company entered into a settlement agreement with Auctus, pursuant to which,
in full and final settlement of all claims asserted by Auctus against the Company in connection with the Auctus Litigation (the
“Auctus Settlement Agreement”) for the outstanding balance due and payable under the Auctus Notes, such amount being
$570,000 (the “Auctus Settlement Value”). Pursuant to the terms and subject to the conditions in the Auctus Settlement
Agreement, the Company agreed to authorize and reserve a number of shares of the Company’s common stock pursuant to the reserve
requirements of the Auctus Notes, as follows: an initial amount of 1,753,846,154 (a multiple of two times the anticipated conversion
of the Auctus Settlement Value), which shall be increased within thirty calendar days to 5,261,538,462 shares (a multiple of six
times the anticipated conversion of the Auctus Settlement Value) (the “Auctus Settlement Shares”) of the common stock
of the Company for issuance upon conversion by the Investor of the amounts owed under the Auctus Notes, in accordance with the
terms of the Auctus Notes, including but not limited to the beneficial ownership limitations contained in the Auctus Notes, as
contemporaneously with the Auctus Settlement Agreement. Such irrevocable authorization and reservation for the initial amount by
the Company shall occur no later than one (1) business day, and for the increase no later than thirty calendar days, after the
effective date of the Auctus Settlement Agreement. In addition to the foregoing, upon the sale by Auctus of the Auctus Settlement
Shares as delivered to Auctus by the Company resulting in total net proceeds less than the Auctus Settlement Value, Auctus is entitled
to additional Auctus Settlement Shares of the Company’s common stock, if, after Auctus has sold all Auctus Settlement Shares,
Auctus delivers a written notice to the Company certifying that Auctus is entitled to receive additional shares of the Company’s
common stock (the “Make-Whole Shares”), the number of Make-Whole Shares being equal to the greater of (i) zero and
(ii) the quotient of (1) the difference of (x) the settlement value with respect to each sale of shares by Auctus after the delivery
of the Auctus Settlement Shares, minus (y) the aggregate net consideration received by Auctus from the resale of all shares of
common stock issued by the Company, divided by (2) the average trailing closing price for ten (10) trading days for the shares
immediately preceding the date of delivery of the Make-Whole Shares.
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.
ORIGINCLEAR, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- AUDITED
DECEMBER 31, 2018 AND 2017
Major Customers
PWT had four major customers for
the year ended December 31, 2018. The customers represented 68.0% of billings for the year ending December 31, 2018. The contract
receivable balance for the customers was $210,365 at December 31, 2018.
PWT had four major customers
for the year ended December 31, 2017. The customers represented 54.48% of billings for the year ending December 31, 2017. The contract
receivable balance for the customers was $98,038 at December 31, 2017.
Major Suppliers
PWT had three major vendors
for the year ended December 31, 2018. The vendors represented 41.0% of total expenses in the year ending December 31, 2018.
The accounts payable balance due to the vendors was $97,974 at December 31, 2018. Management believes no risk is present with
the vendors due to other suppliers being readily available.
PWT
had five major vendors for the
year ended December 31, 2017
. The vendors represented 40.59%
of total expenses in the year ending December 31, 2017. The accounts payable balance due to the vendors was $63,886 at December
31, 2017. Management believes no risk is present with the vendors due to other suppliers being readily available.
Management
has evaluated subsequent events according to the requirements of ASC TOPIC 855 and has determined that there are the following
subsequent events:
On January 16, 2019, the Company
filed a Series G Certificate of Designation with the Nevada Secretary of State (the “Series G Designation”). Pursuant
to the Series G Designation, the Company may issue up to 6,000 shares of Series G preferred stock, each share having a stated value
of $1,000, and pursuant to certain subscription agreements entered into with purchasers of the Series G preferred stock, each purchaser
shall receive shares of the Company’s common stock equal to an amount of, for each share of Series G preferred stock purchased,
five hundred dollars ($500) divided by the closing price on the date the Company receives the executed subscription documents and
purchase price from such investor.
Between January 16, 2019 and
March 20, 2019, the Company entered into subscription agreements with certain accredited investors pursuant to which the Company
sold an aggregate of 530 shares of the Company’s Series G preferred stock for an aggregate purchase price of $530,000.
In connection with the Series
G Designation and subscription agreements entered into with investors, between January 16, 2019 and March 20, 2019, the Company
issued an aggregate of 165,598,887 shares of its common stock to certain holders of its Series G Preferred Stock.
In connection with certain one-time
make good agreements, between January 31, 2019 and March 29, 2019, the Company issued an aggregate of 25,442,156 shares of its
common stock to certain holders of its common stock.
Between January 22, 2019 and
April 17, 2019, the Company issued to consultants and one employee an aggregate of 237,636,726 shares of the Company’s common
stock in lieu of cash considerations.
Between January 8, 2018 and
April 23, 2018, holders of convertible notes, known in our filings as “Convertible Promissory Notes” converted an aggregate
outstanding principal and interest amount of $396,173 into an aggregate of 700,389,733 shares of the Company’s common stock.
On April 3, 2019, the “Company
filed a certificate of designation (the “Series I COD”) of Series I Preferred Stock (the “Series I”) and
a certificate of designation (the “Series J COD”) of Series J Preferred Stock (the “Series J”).
ORIGINCLEAR, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- AUDITED
DECEMBER 31, 2018 AND 2017
|
15.
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SUBSEQUENT EVENTS (Continued)
|
Pursuant to the Series I COD,
the Company designated 4,000 shares of preferred stock as Series I. The Series I will have a stated value of $1,000 per share,
and will be entitled to cumulative dividends at the annual rate of 8% of the stated value, payable quarterly within 60 days from
the end of such fiscal quarter. The Series I will not be entitled to any voting rights except as may be required by applicable
law, and will not be convertible into common stock. The Company will have the right to redeem the Series I at any time while the
Series I are outstanding at a price equal to the stated value plus any accrued but unpaid dividends. The Company will be required
to redeem the Series I two years following the date that is the later of the (i) final closing of the tranche (as designated in
the applicable subscription agreement) or (ii) the expiration date of the tranche that such shares to be redeemed were a part of.
Pursuant to the Series J COD,
the Company designated 100,000 shares of preferred stock as Series J. The Series J will have a stated value of $1,000 per share,
and will be entitled to receive dividends on an as-converted basis with the Company’s common stock. The Series J will be
convertible into validly-issued, fully paid and non-assessable shares of the Company’s common stock, on the terms and conditions
set forth in the Series J COD, which includes certain Make-Good Shares for certain holders of the Company’s previously disclosed
Series F Preferred Stock and Series G Preferred Stock.
Between April 3, 2019 and April
24, 2019, the Company entered into subscription agreements with certain accredited investors pursuant to which the Company sold
an aggregate of 345 shares of the Company’s Series I preferred stock for an aggregate purchase price of $345,000. And in
connection with the Series I Designation and Series J Designation, the Company issued an aggregate of 172.5 shares of its Series
J preferred stock to certain holders of its Series I and Series J Preferred Stock.
On April 19, 2019, the Company
entered into Restricted Stock Grant Agreements (the “April RSGAs”) with its Chief Executive Officer, Riggs Eckelberry,
three members of the Board and five 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 April RSGAs are performance based shares and none have
yet vested nor have any been issued. The April RSGAs provide for the issuance of up to an aggregate of 90,000,000 shares of the
Company’s common stock as follows: 30,000,000 to the CEO, 5,000,000 to each of the other three members of the Board and an
aggregate of 45,000,000 to five consultants 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 an aggregate of 45,000,000 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 an aggregate of 45,000,000 shares of its common stock. As the performance goals are achieved, the shares
shall become eligible for vesting and issuance.
On April 23, 2019, the Company
filed a Certificate of Amendment to its Articles of Incorporation, as amended, with the Secretary of State of the State of Nevada
to effectuate an increase to the number of authorized shares of common stock of the Company from 8,000,000,000 to 16,000,000,000.
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