ORIGINCLEAR, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS-UNAUDITED
JUNE 30, 2019
1.
|
The
accompanying unaudited condensed consolidated financial statements of OriginClear, Inc. (the “Company”) (formerly
OriginOil, Inc.) have been prepared in accordance with accounting principles generally accepted in the United States of America
for interim financial information and with the instructions to Form 10-Q and Rule 10-01 of Regulation S-X. Accordingly,
they do not include all of the information and footnotes required by generally accepted accounting principles for complete
financial statements. In the opinion of management, all normal recurring adjustments considered necessary for a fair presentation
have been included. Operating results for the six months ended June 30, 2019 are not necessarily indicative of
the results that may be expected for the year ending December 31, 2019. For further information refer to the financial
statements and footnotes thereto included in the Company’s Form 10-K for the year ended December 31, 2018.
|
Going
Concern
The accompanying unaudited condensed
consolidated financial statements have been prepared on a going concern basis of accounting, which contemplates continuity of operations,
realization of assets and liabilities and commitments in the normal course of business. The accompanying unaudited condensed
consolidated financial statements do not reflect any adjustments that might result if the Company is unable to continue as a going
concern. The Company’s revenue is not yet sufficient to cover its operating expenditures and has negative cash flows
from operations, which raise substantial doubt about the Company’s ability to continue as a going concern. The ability of
the Company to continue as a going concern and appropriateness of using the going concern basis is dependent upon, among other
things, raising additional capital and increasing sales. Management believes the existing shareholders, prospective new investors,
current and future sales will provide the additional cash needed to meet the Company’s obligations as they become due, and
will allow the development of its core business operations. No assurance can be given that any future financing will be available
or, if available, that it will be on terms that are satisfactory to the Company. Even if the Company is able to obtain additional
financing, it may contain undue restrictions on our operations, in the case of debt financing, or cause substantial dilution for
our stockholders, in case of equity financing.
2.
|
SUMMARY OF SIGNIFICANT
ACCOUNTING POLICES
|
This summary of significant accounting
policies of the Company is presented to assist in understanding the Company’s unaudited condensed consolidated financial
statements. The unaudited condensed consolidated 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 unaudited condensed consolidated
financial statements.
Principles
of Consolidation
The
accompanying unaudited condensed consolidated financial statements include the accounts of OriginClear, Inc. and its wholly owned
operating subsidiaries, Progressive Water Treatment, Inc., and OriginClear Technology Limited. All material intercompany transactions
have been eliminated upon consolidation of these entities.
Loss
per Share Calculations
Basic
loss per share calculations are computed by dividing income (loss) available to common shareholders by the weighted-average number
of common shares available. Diluted earnings per share is computed similar to basic earnings per share except that the denominator
is increased to include securities or other contracts to issue common stock that would have been outstanding if the potential
common shares had been issued and if the additional common shares were dilutive.
Six
months ended June 30, 2019
The Company has excluded 244,087,101
shares of common stock issuable pursuant to outstanding warrants, shares of common stock issuable pursuant to outstanding convertible
debt of $3,706,710, and shares issuable from convertible preferred stock for the three and six months ended June 30, 2019, because
their impact on the loss per share is anti-dilutive.
Six
Months Ended June 30, 2018
The Company has excluded 3,679,637
shares of common stock issuable pursuant to outstanding stock options, 17,985,380 shares of common stock issuable pursuant to outstanding
warrants, shares of common stock issuable pursuant to outstanding convertible debt of $4,363,818 and shares of common stock issuable
pursuant to outstanding convertible preferred stock for the three and six months ended June 30, 2018, because their impact on the
loss per share is anti-dilutive.
Use
of Estimates
The preparation of financial statements
in conformity with accounting principles generally accepted in the United States of America requires management to make estimates
and assumptions that affect the reported amounts of assets and liabilities, disclosure of contingent assets and liabilities at
the date of the financial statements, and the reported amounts of revenues and expenses during the reporting period. Actual results
could differ from those estimates. Significant estimates include estimates used to review the Company’s impairments and estimations
of long-lived assets, revenue recognition on percentage of completion type contracts, allowances for uncollectible accounts, warranty
reserves, inventory valuation, debt beneficial conversion features, 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 the Company believes 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.
ORIGINCLEAR, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS-UNAUDITED
JUNE 30, 2019
2.
|
SUMMARY OF SIGNIFICANT
ACCOUNTING POLICES (Continued)
|
Stock-Based
Compensation
The
Company periodically issues stock options and warrants to employees and non-employees in non-capital raising transactions for
services and for financing costs. The Company accounts for stock option and warrant grants issued and vesting to employees based
on the authoritative guidance provided by the Financial Accounting Standards Board whereas the value of the award is measured
on the date of grant and recognized over the vesting period. The Company accounts for stock option and warrant grants issued and
vesting to non-employees in accordance with the authoritative guidance of the Financial Accounting Standards Board whereas the
value of the stock compensation is based upon the measurement date as determined at either a) the date at which a performance
commitment is reached, or b) at the date at which the necessary performance to earn the equity instruments is complete. Non-employee
stock-based compensation charges generally are amortized over the vesting period on a straight-line basis. In certain circumstances
where there are no future performance requirements by the non-employee, option grants are immediately vested and the total stock-based
compensation charge is recorded in the period of the measurement date.
Revenue
Recognition
We
recognize revenue when services are performed, and at the time of shipment of products, provided that evidence of an arrangement
exists, title and risk of loss have passed to the customer, fees are fixed or determinable, and collection of the related receivable
is reasonably assured.
Revenues
and related costs on construction contracts are recognized as the performance obligations for work are satisfied over time in
accordance with Accounting Standards Codification (“ASC”) 606, Revenue from Contracts with Customers. Under ASC 606,
revenue and associated profit, will be recognized as the customer obtains control of the goods and services promised in the contract
(i.e., performance obligations). All un-allocable indirect costs and corporate general and administrative costs are charged to
the periods as incurred. However, in the event a loss on a contract is foreseen, the Company will recognize the loss as it is
determined.
Revisions
in cost and profit estimates during the course of the contract are reflected in the accounting period in which the facts 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.
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 were $6,996 as of June 30, 2019 and December 31,
2018, respectively. The net contract receivable balance was $209,538 and $309,223 at June 30, 2019 and December 31, 2018, respectively.
Fair
Value of Financial Instruments
Fair
Value of Financial Instruments, requires disclosure of the fair value information, whether or not recognized in the balance sheet,
where it is practicable to estimate that value. As of June 30, 2019, the balances reported for cash, contract receivables, contract
assets, prepaid expenses, accounts payable, contract liabilities, and accrued expenses, and derivative instruments 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;
|
ORIGINCLEAR, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS-UNAUDITED
JUNE 30, 2019
2.
|
SUMMARY OF SIGNIFICANT
ACCOUNTING POLICES (Continued)
|
Fair
Value of Financial Instruments
(Continued)
|
●
|
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 and liabilities measured
and recorded at fair value on the Company’s balance sheets on a recurring basis and their level within the fair value
hierarchy as of June 30, 2019.
|
|
Total
|
|
|
(Level 1)
|
|
|
(Level 2)
|
|
|
(Level 3)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Investment at fair value-securities
|
|
$
|
18,400
|
|
|
$
|
18,400
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Assets measured at fair value
|
|
$
|
18,400
|
|
|
$
|
18,400
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
|
Total
|
|
|
(Level 1)
|
|
|
(Level 2)
|
|
|
(Level 3)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Derivative Liability
|
|
$
|
13,025,486
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
13,025,486
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total liabilities measured at fair value
|
|
$
|
13,025,486
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
13,025,486
|
|
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, 2019
|
|
$
|
9,360,204
|
|
Fair Value of derivative liabilities issued
|
|
|
-
|
|
Loss on net change in derivative liability
|
|
|
3,665,282
|
|
Balance as of June 30, 2019
|
|
$
|
13,025,486
|
|
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 established ASC Topic 842, Leases (Topic 842), by issuing ASU No. 2016-02, which requires lessees to recognize
leases on-balance sheet and disclose key information about leasing arrangements. Topic 842 was subsequently amended by ASU No.
2018-01, Land Easement Practical Expedient for Transition to Topic 842; ASU No. 2018-10, Codification Improvements to Topic 842,
Leases; and ASU No. 2018-11, Targeted Improvements. The new standard establishes a right-of-use (ROU) model that requires a lessee
to recognize a ROU asset and lease liability on the balance sheet. Leases will be classified as finance or operating, with classification
affecting the pattern and classification of expense recognition in the statement of operations. The Company adopted the new standard
on January 1, 2019.
ORIGINCLEAR, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS-UNAUDITED
JUNE 30, 2019
2.
|
SUMMARY OF SIGNIFICANT ACCOUNTING POLICES (Continued)
|
Recently
Issued Accounting Pronouncements
(Continued)
The
new standard provides a number of optional practical expedients in transition. The Company has elected the ‘package of practical
expedients’, which permit it not to reassess under the new standard its prior conclusions about lease identification, lease
classification and initial direct costs. The Company did not elect the use-of-hindsight or the practical expedient pertaining
to land easements; the latter is not applicable to the Company.
The new standard did not have
a material impact on the Company’s unaudited condensed consolidated financial statements.
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 has evaluated the impact of the adoption of ASU 2017-12 on the
Company’s unaudited condensed consolidated financial statements, which had no material impact.
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 adopted
ASU 2018-07 on the January 1, 2019. The adoption of the new standard did not have a material impact on the Company’s
unaudited condensed consolidated 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 unaudited condensed consolidated financial statements.
Reclassification of Expenses
During the six months ended June
30, 2019, certain expenses were reclassified in the financial statements, which had no material effect.
3.
|
CAPITAL
STOCK
Preferred
Stock
As
of April 11, 2018, the Board of Directors authorized an increase in shares of preferred stock, par value $0.0001 per share
to 550,000,000 shares from 750,000 shares. The Board adopted a Certificate of Designation establishing the rights, preferences,
privileges and other terms of Series D preferred stock and Series D-1 preferred stock, par value $0.0001 per share. The
Board authorized and approved 400,000,000 shares of Series D and 50,000,000 shares of Series D-1 preferred stock.
|
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.
Series
D
On
April 13, 2018, the Board adopted resolutions creating a series of shares of convertible preferred stock designated 400,000,000
shares 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 did not have a dividend rate or liquidation preference and did not carry any voting rights. As of August
14, 2018, the Series D preferred stock were cancelled, and exchanged for Series E preferred shares.
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 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 upon 61 days written notice. The Company issued an aggregate of 38,500,000 Series D-1 preferred shares for
services. As of June 30, 2019, there were 38,500,000 Series D-1 preferred shares issued and outstanding.
ORIGINCLEAR, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS-UNAUDITED
JUNE 30, 2019
3.
|
CAPITAL
STOCK (Continued)
|
Preferred
Stock
(Continued)
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. 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 a number
of shares of common stock equal to the greater of (A) 100 shares of common stock and (B) the number of shares of common stock the
holder would have received pursuant to such holder’s respective subscription agreement if the preferred shares were priced
based on the average closing sale price of the common stock during the three trading days prior to the date the holder requests
a conversion, provided the lowest price for which an adjustment will be made is 50% of the purchase price paid by any purchase
of the Series E preferred 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 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 upon 61 days written notice. As of June 30, 2019, there were 2,139,649
shares of Series E preferred stock issued and outstanding. In connection with the issuance of the Series E preferred stock, the
Company also issued one hundred warrants to purchase shares of common stock for each share of Series E preferred stock.
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 6,000 shares of 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 have a liquidation preference of
stated value per share of $1,000 per share plus any accrued but unpaid dividends thereon before any distribution or payment may
be made to the holders of any common stock or any other series of capital stock (other than the Series B Preferred Stock) then-existing
or thereinafter created. The stated value of Series F preferred stock is $1,000 per share and holders of Series F preferred stock
are entitled to cumulative dividends at the annual rate of 8% of the stated value, payable quarterly. 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. The Series F Preferred Stock is not convertible into common stock. As of June
30, 2019, the Company accrued dividends in the amount of $33,560. As of June 30, 2019, there were 1,678 shares of Series F preferred
stock issued and outstanding.
Series
G
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 per share and holders of Series G preferred stock are entitled to cumulative dividends
at the annual rate of 8% of the stated value, payable quarterly. 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. As
of June 30, 2019, the Company issued an aggregate of 165,598,887 shares of its common stock to certain holders of its Series G
preferred stock. As of June 30, 2019, the Company accrued dividends in the amount of $10,600.
Series
I / J
On April 3, 2019, the Company
filed a Series I Certificate of Designation (the “Series I COD”) for its Series I Preferred Stock (the “Series
I”) and a Series J Certificate of designation (the “Series J COD”) for its Series J Preferred Stock (the “Series
J”) with the Nevada Secretary of State. Pursuant to the Series I COD, the Company designated 4,000 shares of preferred
stock as Series I. The Series I has a stated value of $1,000 per share. Series I holders are entitled to cumulative dividends at
the annual rate of 8% of the stated value, payable quarterly within 60 days from the end of each 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 has a stated value of $1,000 per share and holders will be entitled to receive
dividends on an as-converted basis with the Company’s common stock. The Series J preferred stock is convertible into 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. As
of June 30, 2019, the Company issued an aggregate of 797.4 shares of its Series I preferred stock and 398.7 shares of its Series
J preferred stock. As of June 30, 2019, the Company accrued dividends in the amount of $10,432.
ORIGINCLEAR, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS-UNAUDITED
JUNE 30, 2019
|
3.
|
CAPITAL
STOCK (Continued)
|
Preferred
Stock
(Continued)
Series
K / L
On June 3, 2019, the Company executed
a Series K Certificate of Designation (the “Series K COD”) for its Series K Preferred Stock (the “Series K”)
and a Series L Certificate of designation (the “Series L COD”) for its Series L Preferred Stock (the “Series
L”). Pursuant to the Series K COD, the Company designated 4,000 shares of preferred stock as Series K. The Series K
has a stated value of $1,000 per share. Series K holders are entitled to cumulative dividends at the annual rate of 8% of the stated
value, payable quarterly within 60 days from the end of each fiscal quarter. The Series K 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 K at any time while the Series K 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 K 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 L COD, the Company designated 100,000 shares of preferred stock
as Series L. The Series L has a stated value of $1,000 per share and holders will be entitled to receive dividends on an as-converted
basis with the Company’s common stock. The Series L preferred stock is 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 L COD, which includes certain Make-Good
Shares for certain holders of the Company’s previously disclosed investment rounds. As of June 30, 2019, the Company issued
an aggregate of 87.5 shares of its Series K preferred stock and 43.75 shares of its Series L preferred stock. As of June 30, 2019,
the Company accrued dividends in the amount of $118.
Common
Stock
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.
Six
months ended June 30, 2019
The Company issued 1,285,227,966
shares of common stock upon conversion of convertible promissory notes in an aggregate principal amount of $384,588, and a default
settlement of $60,775, plus interest in the amount of $79,082, with an aggregate fair value loss on conversion of debt in the amount
of $747,556, based upon conversion prices of $0.0003 to $0.0018.
The
Company issued 426,007,381 shares of common stock for services at fair value of $383,334.
The
Company issued 165,598,887 shares of common stock through a private placement for purchase of Series G preferred stock.
Six
months ended June 30, 2018
The
Company issued 13,193,638 shares of common stock upon conversion of convertible promissory notes in an aggregate principal in
the amount of $88,000, plus interest in the amount of $30,743, with an aggregate fair value loss on conversion of debt in the
amount of $263,790, based upon conversion prices of $0.019 to $0.0329.
The
Company issued 26,452,621 shares of common stock for services at fair value of $752,914.
4.
|
CONVERTIBLE PROMISSORY NOTES
|
As
of June 30, 2019, the outstanding convertible promissory notes are summarized as follows:
Convertible Promissory Notes
|
|
$
|
3,706,710
|
|
Less current portion
|
|
|
3,308,582
|
|
Total long-term liabilities
|
|
$
|
398,128
|
|
ORIGINCLEAR, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS-UNAUDITED
JUNE 30, 2019
4.
|
CONVERTIBLE PROMISSORY NOTES (Continued)
|
Maturities
of long-term debt for the next four years are as follows:
Period Ending
|
|
|
|
June 30, 2019
|
|
Amount
|
|
2020
|
|
|
3,308,582
|
|
2021
|
|
|
325,000
|
|
2022
|
|
|
-
|
|
2023
|
|
|
73,128
|
|
|
|
$
|
3,706,710
|
|
The
remaining balance in convertible promissory notes as of June 30, 2019 was $3,706,710.
On
various dates, the Company issued unsecured convertible promissory notes (the “Notes”), that matured during the period
and were extended sixty (60) days from the effective date of each Note. The Notes bear interest at 10% per annum. The Notes may
be converted into shares of the Company’s common stock at conversion prices ranging from the lesser of $2.10 to $4.90 (subject
to adjustment for stock splits, dividends, combinations and other similar transactions) or 50% of the lowest trade price on any
trade day following issuance of the Notes. In addition, for as long as the Notes or other convertible notes in effect between
the purchaser and the Company are outstanding, if the Company issues any security with terms more favorable than the terms of
the Notes or such other convertible notes or a term was not similarly provided to the purchaser of the Notes or such other convertible
notes, then such more favorable or additional term shall, at the purchaser’s option, become part of the Notes and such other
convertible notes. The conversion feature of the Notes was considered a derivative in accordance with current accounting guidelines
because of the reset conversion features of the Notes. During the six months ended June 30, 2019, the Company issued 515,481,277
shares of common stock, upon conversion of $142,300 in principal, plus accrued interest of $63,247, with a fair value loss on
settlement of $299,284. As of June 30, 2019, the Notes had an aggregate remaining balance of $1,137,000.
As of December 31, 2018, the
unsecured convertible promissory notes (the “OID Notes”) had an aggregate remaining principal balance of $143,228,
The OID Notes included an original issue discount and one time interest, which has been fully amortized. The OID Notes matured
on June 30, 2018, and were extended through June 30, 2023. 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 six months ended June 30, 2019, the Company issued 140,222,222 shares of common stock upon conversion
of $70,100 in principal, with a fair value loss on conversion of debt in the amount of $126,144. As of June 30, 2019, the remaining
balance on the note was $73,128.
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 June 30, 2019,
was $1,325,000.
The
Company issued a convertible note (the “Dec 2015 Note”) in exchange for an accounts payable in the amount of $432,048,
which could be converted into shares of the Company’s common stock after December 31, 2015. The Dec 2015 Note was accounted
for under ASC 470, whereby, a beneficial conversion feature was recorded at time of issuance. The Dec 2015 Note did not meet the
criteria of a derivative, and was accounted for as a beneficial conversion feature, which was amortized over the life of the Dec
2015 Note and recognized as interest expense in the financial statements. On January 1, 2016, the Dec 2015 Note met the criteria
of a derivative and was accounted for under ASC 815. The Dec 2015 Note has zero stated interest rate, and the conversion price
shall be equal to 75% of the average three lowest last sale prices traded during the 25 trading days immediately prior to conversion.
As of June 30, 2019, the remaining balance on the Dec 2015 Note was $167,048.
The
Company issued a convertible note (the “Sep 2016 Note”) in exchange for an accounts payable in the amount of $430,896,
which could be converted into shares of the Company’s common stock after September 15, 2016. The Sep 2016 Note was accounted
for under ASC 470, whereby, a beneficial conversion feature was recorded at time of issuance. On September 15, 2016, the Sep 2016
Note met the criteria of a derivative and was accounted for under ASC 815. The Sep 2016 Note has zero stated interest rate, and
the conversion price shall be equal to 75% of the average three lowest last sale prices traded during the 25 trading days immediately
prior to conversion. The Sep 2016 Note did not meet the criteria of a derivative at the time it was entered into, and was accounted
for as a beneficial conversion feature, which was amortized over the life of the Sep 2016 Note and recognized as interest expense
in the financial statements. The conversion feature of the Sep 2016 Note was considered a derivative in accordance with current
accounting guidelines because of the reset conversion feature of the Sep 2016 Note. As of June 30, 2019, the remaining balance
on the Sep 2016 Note was $430,896.
ORIGINCLEAR, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS-UNAUDITED
JUNE 30, 2019
4.
|
CONVERTIBLE PROMISSORY NOTES (Continued)
|
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 six
months ended June 30, 2019, the Company issued 148,027,924 shares of common stock, upon conversion of principal in the amount
of $81,000, plus accrued interest of $5,903, and a loss on settlement of $40,500, with a fair value loss on conversion of debt
in the amount of $99,667. The Company recorded amortization of debt discount, which was recognized as interest expense in the
amount of $42,260 during the six months ended June 30, 2019. As of June 30, 2019, the Jan-Aug 2018 Notes were fully converted.
The Company issued two (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 had a maturity date of 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 period ended June
30, 2019, the Company entered into a settlement agreement with the investor in the amount of $20,275 (50% of the outstanding balance
of $40,550), based on the outstanding balance due and payable under the Notes. During the six months ended June 30, 2019, the Company
issued 153,329,894 shares of common stock, upon conversion of principal in the amount of $40,550, plus accrued interest of $5,206,
and a loss on settlement of $20,275, with a fair value loss on conversion of debt of $131,781. The Company recorded amortization
of debt discount, which was recognized as interest expense in the amount of $50,702 during the six months ended June 30, 2019. As
of June 30, 2019, the Note was fully converted.
The Company issued two (2) unsecured
convertible promissory notes (the “Apr & May 2018 Notes”), in the aggregate amount of $300,000 on April 2, 2018
and May 31, 2018. The Apr & May 2018 Notes mature on April 2, 2019 and May 31, 2019, respectively. 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 six months ended June 30, 2019, the Company issued 25,000,000
shares of common stock upon conversion of principal in the amount of $6,523, plus accrued interest of $4,727, with a fair value
loss on conversion of $16,250. On March 13, 2019, the Company entered into a settlement agreement with the investor in the amount
of $570,000, based on the outstanding balance due and payable under the Apr & May 2018 Notes. The Company set up a reserve
of 5,261,538,462 shares of common stock of the Company for issuance upon conversion by the investor of the amounts owed under the
Notes, in accordance with the terms of the Notes, including, but no limited to the beneficial ownership limitations contained in
the Notes. In addition to the foregoing, upon the sale by the investor of the settlement shares as delivered to the investor by
the Company, resulting in total net proceeds less than the settlement value, the investor is entitled to additional settlement
shares of the Company’s common stock. If after the investor has sold all settlement shares, the investor delivers a written
notice to the Company certifying that the investor is entitled to additional settlement 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 the Investor after the delivery of the
Settlement Shares, minus (y) the aggregate net consideration received by the Investor 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. The Company recorded amortization of debt discount, which was recognized as interest
expense in the amount of $51,605 during the six months ended June 30, 2019. As of June 30, 2019, the remaining balance on
the Apr & May 2018 Notes were $542,752, plus accrued interest of $27,248, which includes the settlement.
The Company issued an unsecured
convertible promissory notes (the “Nov 2018 Note”), in the sum amount of $75,000 on November 30, 2018. The Nov 2018
Note matures on November 30, 2019. The Nov 2018 Note bears interest at 10% per annum. The Nov 2018 Note may be converted into shares
of the Company’s common stock at a fixed conversion price of $0.05 per share or 50% of the average three (3) lowest trading
prices twenty (20) trading days prior to conversion. The conversion feature of the Nov 2018 Note was considered a derivative in
accordance with current accounting guidelines because of the reset conversion features of the Notes. During the six months ended
June 30, 2019, the Company issued 303,166,649 shares of common stock upon conversion of principal in the amount of $44,114, with
a fair value loss on conversion of debt in the amount of $74,430. The Company recorded amortization of debt discount, which was
recognized as interest expense in the amount of $1,438 during the six months ended June 30, 2019. As of June 30, 2019, the
remaining balance on the Nov 2018 Note was $30,886.
ORIGINCLEAR, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS-UNAUDITED
JUNE 30, 2019
4.
|
CONVERTIBLE PROMISSORY NOTES (Continued)
|
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 June 30, 2019 was $13,025,486.
|
5.
|
DERIVATIVE
LIABILITIES
|
We
evaluated the financing transactions in accordance with ASC Topic 815, Derivatives and Hedging, and determined that the conversion
feature of the convertible promissory note was not afforded the exemption for conventional convertible instruments due to its
variable conversion rate. The note has no explicit limit on the number of shares issuable so they did not meet the conditions
set forth in current accounting standards for equity classification. The Company elected to recognize the note under paragraph
815-15-25-4, whereby, there would be a separation into a host contract and derivative instrument. The Company elected to initially
and subsequently measure the note in its entirety at fair value, with changes in fair value recognized in earnings. The Company
recorded a derivative liability representing the imputed interest associated with the embedded derivative. The derivative liability
is adjusted periodically per the stock price fluctuations.
The
convertible notes issued and described in Note 4 do not have fixed settlement provisions because their conversion prices are not
fixed. The conversion feature has been characterized as derivative liabilities to be re-measured at the end of every reporting
period with the change in value reported in the statement of operations.
During the six months ended June
30, 2019, the Company converted $384,588 in principal of convertible promissory notes, plus accrued interest of $79,082, and a
loss on settlement of debt in the amount of $60,775. As a result of the conversion of these notes and the change in fair value
of the remaining notes, the Company recorded a loss on conversion of debt in the amount of $767,831 in the statement of operations
for the six months ended June 30, 2019. At June 30, 2019, the fair value of the derivative liability was $13,025,486.
For
purpose of determining the fair market value of the derivative liability for the embedded conversion, the Company used the
Binomial lattice valuation model. The significant assumptions used in the Binomial lattice valuation model for the derivative
are as follows:
|
|
|
6/30/19
|
|
Risk free interest rate
|
|
|
1.75% - 2.27
|
%
|
Stock volatility factor
|
|
|
102.0% - 285.0
|
%
|
Weighted average expected option life
|
|
|
1 months - 5 years
|
|
Expected dividend yield
|
|
|
None
|
|
6.
|
RESTRICTED STOCK AND WARRANTS
|
Restricted
Stock to CEO
On May 12, 2016, the Company
entered into a Restricted Stock Grant Agreement (the “RSGA”) with its Chief Executive Officer, Riggs Eckelberry, to
create management incentives to improve the economic performance of the Company and to increase its value and stock price. All
shares issuable under the RSGA are performance based shares and none have yet vested nor have any been issued. The RSGA provides
for the issuance of up to 1,714,286 shares of the Company’s common stock 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.
ORIGINCLEAR, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS-UNAUDITED
JUNE 30, 2019
6.
|
RESTRICTED STOCK AND WARRANTS (Continued)
|
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.
On
May 16, 2018, the Company entered into a Restricted Stock Grant Agreement (the “May 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 May RSGA are performance based shares and none have yet vested nor have
any been issued. The May RSGA provides for the issuance of up to 30,000,000 shares of the Company’s common stock to the
CEO provided certain milestones are met in certain stages; a) If the Company’s consolidated gross revenue, calculated in
accordance with generally accepted accounting principles, consistently applied, equals or exceeds $15,000,000 for the trailing
twelve month period, the Company will issue up to 15,000,000 shares of its common stock; b) If the Company’s consolidated
operating profit (
Operating Profit = Operating Revenue - Cost of Goods Sold - Operating Expenses - Depreciation & Amortization),
calculated in accordance with generally accepted accounting principles, equals or exceeds $1,500,000 for the trailing twelve
month period as reported as reported in the Company’s SEC Reports, the Company will issue up to 15,000,000 shares of its
common stock. The Company has not recognized any costs associated with the milestones, due to not being able to estimate the probability
of it being achieved. As the performance goals are achieved, the shares shall become eligible for vesting and issuance.
On
September 28, 2018, the Company entered into a Restricted Stock Grant Agreement (the “September 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 September RSGA are performance based shares and none have yet
vested nor have any been issued. The September RSGA provides for the issuance of up to 30,000,000 shares of the Company’s
common stock to the CEO provided certain milestones are met in certain stages; a) If the Company’s consolidated gross revenue,
calculated in accordance with generally accepted accounting principles, consistently applied, equals or exceeds $15,000,000 for
the trailing twelve month period, the Company will issue up to 15,000,000 shares of its common stock; b) If the Company’s
consolidated operating profit (
Operating Profit = Operating Revenue - Cost of Goods Sold - Operating Expenses - Depreciation
& Amortization),
calculated in accordance with generally accepted accounting principles, equals or exceeds $1,500,000
for the trailing twelve month period as reported as reported in the Company’s SEC Reports, the Company will issue up to
15,000,000 shares of its common stock. The Company has not recognized any costs associated with the milestones, due to not being
able to estimate the probability of it being achieved. As the performance goals are achieved, the shares shall become eligible
for vesting and issuance.
On
April 19, 2019, the Company entered into Restricted Stock Grant Agreements (the “April 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 April RSGA are performance based shares and none have yet vested nor have
any been issued. The April RSGA provide for the issuance of up to an aggregate of 30,000,000 shares of the Company’s common
stock to the CEO provided certain milestones are met in certain stages; a) If the Company’s consolidated gross revenue,
calculated in accordance with generally accepted accounting principles, consistently applied, equals or exceeds $15,000,000 for
the trailing twelve month period, the Company will issue up to an aggregate of 15,000,000 shares of its common stock; b) If the
Company’s consolidated operating profit (
Operating Profit = Operating Revenue - Cost of Goods Sold - Operating Expenses
- Depreciation & Amortization),
calculated in accordance with generally accepted accounting principles, equals or exceeds
$1,500,000 for the trailing twelve month period as reported as reported in the Company’s SEC reports, the Company will issue
up to an aggregate of 15,000,000 shares of its common stock. The Company has not recognized any costs associated with the milestones,
due to not being able to estimate the probability of it being achieved. As the performance goals are achieved, the shares shall
become eligible for vesting and issuance.
ORIGINCLEAR, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS-UNAUDITED
JUNE 30, 2019
6.
|
RESTRICTED STOCK AND WARRANTS (Continued)
|
Restricted
Stock to Employees and Consultants
On May 12, 2016, the Company
entered into a Restricted Stock Grant Agreement (the “Employee RSGAs”) with two employees, 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 Employee
RSGAs are performance based shares and none have yet vested nor have any been issued. The Employee RSGAs provide to each of the
employees the issuance of up to 857,143 shares of the Company’s common stock to the employee provided certain milestones
are met in certain stages; a) If the Company’s consolidated gross revenue, calculated in accordance with generally accepted
accounting principles, consistently applied, equals or exceeds $15,000,000 for the trailing twelve month period as reported in
the Company’s quarterly or annual financial statements, the Company will issue to each of the employees 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 to each of the employees 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 August 10, 2016, the Company
entered into a Restricted Stock Grant Agreement (the “Consultants RSGA”) with two 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 to each of the consultants up to 142,857 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 November 10, 2017, the Company
entered into a Restricted Stock Grant Agreement (the “Nov 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 Nov
Employee RSGA are performance based shares and none have yet vested nor have any been issued. The Nov Employee RSGA provides the
issuance of up to 2,000,000 shares of the Company’s common stock provided certain milestones are met in certain stages; a)
If the Company’s consolidated gross revenue, calculated in accordance with generally accepted accounting principles, consistently
applied, equals or exceeds $15,000,000 for the trailing twelve month period, the Company will issue to the employee up to 1,000,000
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 to the employee up to 1,000,000 shares of its common stock. The Company has not recognized
any costs associated with the milestones, due to not being able to estimate the probability of it being achieved. As the performance
goals are achieved, the shares shall become eligible for vesting and issuance.
ORIGINCLEAR, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS-UNAUDITED
JUNE 30, 2019
6.
|
RESTRICTED STOCK AND WARRANTS (Continued)
|
On
May 16, 2018, the Company entered into a Restricted Stock Grant Agreement (the “Employee and Consultant RSGA”) with
one employee and one consultant, 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 Employee and Consultant RSGA are performance based shares and none have
yet vested nor have any been issued. The Employee and Consultant RSGA provides to the employee and consultant the issuance of
an aggregate of 4,000,000 shares of the Company’s common stock provided certain milestones are met in certain stages; a)
If the Company’s consolidated gross revenue, calculated in accordance with generally accepted accounting principles, consistently
applied, equals or exceeds $15,000,000 for the trailing twelve month period, the Company will issue to the employee and consultant
an aggregate of 2,000,000 shares in 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 to the employee and consultant an aggregate of 2,000,000 shares
of its common stock. The Company has not recognized any costs associated with the milestones, due to not being able to estimate
the probability of it being achieved. As the performance goals are achieved, the shares shall become eligible for vesting and
issuance.
On
August 9, 2018, the Company entered into a Restricted Stock Grant Agreement (the “Employee and Consultants RSGA”)
with three consultants and one 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 Employee and Consultants RSGA are performance based shares
and none have yet vested nor have any been issued. The Employee and Consultants RSGA provides to the employee and consultants
the issuance of an aggregate of 8,500,000 shares of the Company’s common stock provided certain milestones are met in certain
stages; a) If the Company’s consolidated gross revenue, calculated in accordance with generally accepted accounting principles,
consistently applied, equals or exceeds $15,000,000 for the trailing twelve month period, the Company will issue to the employee
and consultants in various amounts an aggregate of 4,250,000 shares in 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 to the employee and consultants
in various amounts an aggregate of 4,250,000 shares of its common stock. The Company has not recognized any costs associated with
the milestones, due to not being able to estimate the probability of it being achieved. As the performance goals are achieved,
the shares shall become eligible for vesting and issuance.
On
September 28, 2018, the Company entered into a Restricted Stock Grant Agreement (the “Sep 2018 Consultants RSGA”)
with two 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 Sep 2018 Consultants RSGA are performance based shares and none have yet vested
nor have any been issued. The Sep 2018 Consultants RSGA provides to the consultants the issuance of an aggregate of 27,000,000
shares of the Company’s common stock provided certain milestones are met in certain stages; a) If the Company’s consolidated
gross revenue, calculated in accordance with generally accepted accounting principles, consistently applied, equals or exceeds
$15,000,000 for the trailing twelve month period, the Company will issue to the consultants in various amounts an aggregate of
13,500,000 shares in 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 to the consultants in various amounts an aggregate of 13,500,000 shares of its common stock.
The Company has not recognized any costs associated with the milestones, due to not being able to estimate the probability of
it being achieved. As the performance goals are achieved, the shares shall become eligible for vesting and issuance.
On
April 19, 2019, the Company entered into a Restricted Stock Grant Agreement (the “Apr 2019 RSGAs”) with three board
members 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 Apr 2019 RSGAs are performance based shares and none have yet vested
nor have any been issued. The Apr 2019 RSGAs provide to the consultants and board members the issuance of an aggregate of 60,000,000
shares of the Company’s common stock provided certain milestones are met in certain stages; a) If the Company’s consolidated
gross revenue, calculated in accordance with generally accepted accounting principles, consistently applied, equals or exceeds
$15,000,000 for the trailing twelve month period, the Company will issue to the board members and consultants in various amounts
an aggregate of 30,000,000 shares in 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 to the board members and consultants in various amounts an
aggregate of 30,000,000 shares of its common stock. The Company has not recognized any costs associated with the milestones, due
to not being able to estimate the probability of it being achieved. As the performance goals are achieved, the shares shall become
eligible for vesting and issuance.
ORIGINCLEAR, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS-UNAUDITED
JUNE 30, 2019
6.
|
RESTRICTED STOCK AND WARRANTS (Continued)
|
Warrants
As
of June 30, 2019, the Company issued no warrants during the period. A summary of the Company’s warrant activity and related
information follows for the six months ended June 30, 2019:
|
|
June 30, 2019
|
|
|
|
|
|
|
Weighted
|
|
|
|
Number
|
|
|
average
|
|
|
|
of
|
|
|
exercise
|
|
|
|
Warrants
|
|
|
price
|
|
Outstanding -beginning of the period
|
|
|
250,912,025
|
|
|
$
|
0.24
|
|
Granted
|
|
|
-
|
|
|
|
-
|
|
Exercised
|
|
|
-
|
|
|
|
-
|
|
Forfeited/Expired
|
|
|
(6,824,924
|
)
|
|
$
|
0.12
|
|
Outstanding - end of the period
|
|
|
244,087,101
|
|
|
$
|
0.25
|
|
At
June 30, 2019, the weighted average remaining contractual life of warrants outstanding:
|
|
|
|
|
|
|
|
|
Weighted
|
|
|
|
|
|
|
|
|
|
|
Average
|
|
|
|
|
|
|
|
|
|
|
Remaining
|
|
Exercisable
|
|
|
Warrants
|
|
|
Warrants
|
|
|
Contractual
|
|
Prices
|
|
|
Outstanding
|
|
|
Exercisable
|
|
|
Life (years)
|
|
$
|
0.250
|
|
|
|
244,087,101
|
|
|
|
244,087,101
|
|
|
|
2.37
|
|
|
|
|
|
|
244,087,101
|
|
|
|
244,087,101
|
|
|
|
|
|
At
June 30, 2019, the aggregate intrinsic value of the warrants outstanding was $0.
7.
|
REVENUE FROM CONTRACTS WITH CUSTOMERS
|
Equipment
Contracts
Revenues
and related costs on equipment contracts are recognized as the performance obligations for work are satisfied over time in accordance
with Accounting Standards Codification (“ASC”) 606, Revenue from Contracts with Customers. Under ASC 606, revenue
and associated profit, will be recognized as the customer obtains control of the goods and services promised in the contract (i.e.,
performance obligations). All un-allocable indirect costs and corporate general and administrative costs are charged to the periods
as incurred. However, in the event a loss on a contract is foreseen, the Company will recognize the loss as it is determined.
The
following table represents a disaggregation of revenue by type of good or service from contracts with customers for the six months
ended June 30, 2019 and 2018:
|
|
Six Months Ended
|
|
|
|
June 30,
|
|
|
|
2019
|
|
|
2018
|
|
Equipment Contracts
|
|
$
|
1,199,080
|
|
|
$
|
1,864,686
|
|
Component Sales
|
|
|
488,265
|
|
|
|
624,564
|
|
Services Sales
|
|
|
59,620
|
|
|
|
49,286
|
|
Licensing Fees
|
|
|
10,000
|
|
|
|
45,607
|
|
|
|
$
|
1,756,965
|
|
|
$
|
2,584,143
|
|
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 six months ending June 30, 2019 was $264,470 and for the year ending December
31, 2018 was $111,001. The contract liability for the six months ending June 30, 2019 was $16,641 and for the year ending December
31, 2018 was $112,894.
ORIGINCLEAR, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS-UNAUDITED
JUNE 30, 2019
8.
|
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. The Note bears a default clause, which increases the rate of interest to 20%
automatic late fee on the unpaid balance, plus the monthly interest increases to 20%, if the accrued interest is not paid
per the agreement every six months. As of June 30, 2019, the issuer defaulted on the convertible note, and was charged
$16,980 in interest for the period. As of June 30, 2019, the note included principal of $80,000 plus accrued interest
of $29,879.
Fair
value investment in Securities
|
|
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 June 30, 2019, the fair value of the preferred shares was $18,400.
|
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 June 30, 2019 was $512,465, less finance cost of $12,566 for a net balance of $499,899.
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 monthly payments are $4,318, and the maturity date
of the Note is August 1, 2028. The note is personally guaranteed by the Company’s CEO.
As
of June 30, 2019, the maturities are summarized as follows:
Promissory note payable
|
|
$
|
74,931
|
|
Less current portion
|
|
|
100
|
|
Long term portion
|
|
$
|
74,831
|
|
|
|
|
|
|
Long term maturities for the next five years are as follows:
|
|
|
|
|
2020
|
|
$
|
297
|
|
2021
|
|
|
419
|
|
2022
|
|
|
693
|
|
2023
|
|
|
820
|
|
2024 thru 2028
|
|
|
72,702
|
|
|
|
$
|
74,931
|
|
LOAN 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 at various maturity dates.
The funds were used for operating expenses. The principal balance as December 31, 2018 was $219,841. During the six months ended
June 30, 2019, the Company made principal payments in the amount of $31,633, leaving a balance of $188,208 as of June 30, 2019.
ORIGINCLEAR, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS-UNAUDITED
JUNE 30, 2019
The Company entered into a capital
lease for the purchase of equipment during the year ended December 31, 2018 with a purchase option at the end of the lease for
$1.00.
Capital
Lease – Equipment
The
Company entered into a five (5) year equipment lease in the amount of $45,440, which was recorded as a capital lease. The lease
is for a sixty (60) month term, and there are no escalation or renewal options associated with this lease. The lease has a purchase
option to buy the equipment at the end of the lease for one dollar ($1). The monthly lease payments are $757 per month. The future
minimum lease payments due as of June 30, 2019 total $31,462.
As
of June 30, 2019, the maturities are summarized as follows:
Capital lease
|
|
$
|
31,462
|
|
Less current portion
|
|
|
9,088
|
|
Total long-term liabilities
|
|
$
|
22,374
|
|
Long
term maturities for the next four years are as follows:
Period Ending June 30,
|
2019
|
|
$
|
9,088
|
|
2020
|
|
|
9,088
|
|
2021
|
|
|
9,088
|
|
2022
|
|
|
4,198
|
|
|
|
$
|
31,462
|
|
11.
|
COMMITMENTS AND CONTINGENCIES
|
Operating
Lease – Related Party
The
Company entered into a month-to-month lease agreement with a shareholder of the Company for office space in McKinney, Texas at
a base rent of $4,750 per month.
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.
Management
has evaluated subsequent events according to the requirements of ASC TOPIC 855 and has determined that there are the following
subsequent events:
Between July 5, 2019 and August
8, 2019, the Company entered into subscription agreements with certain accredited investors pursuant to which the Company sold
an aggregate of 625 shares of the Company’s Series K preferred stock for an aggregate purchase price of $625,000. The Company
also issued an aggregate of 312.5 shares of its Series L preferred stock to the investors.
Between
July 17, 2019 and August 8, 2019, holders of convertible notes, known in our filings as “Convertible Promissory Notes”
converted an aggregate outstanding principal and interest amount of $68,087 into an aggregate of 680,866,641 shares of the Company’s
common stock.
In
connection with certain one-time make good agreements, on July 31, 2019, the Company issued an aggregate of 27,672,956 shares
of its common stock to certain holders of its common stock.
Between
July 31, 2019 and August 2, 2019, the Company issued to consultants an aggregate of 38,333,333 shares of the Company’s common
stock in lieu of cash considerations.
On August 14, 2019, the Company’s
Board of Directors approved amendments and new Restricted Stock Grant Agreements (the amended and new “Aug 2019 RSGAs”)
for its Chief Executive Officer, Riggs Eckelberry, three members of the Board, five consultants and all full-time employees to
create incentives to improve the economic performance of the Company and to increase its value and stock price. All shares issuable
under the Aug 2019 RSGAs are performance based shares and none have yet vested nor have any been issued. The Aug 2019 RSGAs provide
for the issuance of up to an aggregate of 779,000,000 shares of the Company’s common stock as follows: 125,000,000 to the
CEO, 20,000,000 to each of the other three members of the Board, an aggregate of 99,000,000 to five consultants, and an aggregate
of 495,000,000 to all full-time 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, the Company will issue in various amounts up to an aggregate of 389,500,000 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 in various amounts up to an aggregate of 389,500,000 shares of its common stock. As the performance
goals are achieved, the shares shall become eligible for vesting and issuance, including an alternate vesting election after two
years.
On August 15, 2019 the Company
issued to consultants an aggregate of 206,750,000 shares of the Company’s common stock for services.