NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS-UNAUDITED
SEPTEMBER
30, 2018
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 nine months ended September 30, 2018 are not necessarily indicative of the results
that may be expected for the year ending December 31, 2018. 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, 2017.
|
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, additional cash infusion. Management believes the existing shareholders, the 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 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 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.
The
Company has excluded 3,609,143 stock options, 261,149,413 warrants, convertible debt of $3,494,546 and shares issuable from convertible
preferred stock for the nine months ended September 30, 2018, because their impact on the loss per share is anti-dilutive. The
Company did include convertible debt of $549,308 in its diluted earnings per share, because their impact on the earnings per share
is dilutive.
The
Company has excluded 3,697,495 of stock options, 474,335 warrants, and the shares issuable from convertible debt of $3,667,068
and shares issuable from convertible preferred stock for the nine months ended September 30, 2018, 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.
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 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.
ORIGINCLEAR,
INC. AND SUBSIDIARIES
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS-UNAUDITED
SEPTEMBER
30, 2018
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 was approximately
$6,996 as of September 30, 2018 and December 31, 2017, respectively. The net contract receivable balance was $384,937 and $490,441
at September 30, 2018 and December 31, 2017, 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 September 30, 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.
ORIGINCLEAR,
INC. AND SUBSIDIARIES
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS-UNAUDITED
SEPTEMBER
30, 2018
2.
|
SUMMARY
OF SIGNIFICANT ACCOUNTING POLICES (Continued)
|
Fair
Value of Financial Instruments
(Continued)
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 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 September 30, 2018.
|
|
|
Total
|
|
|
(Level
1)
|
|
|
(Level
2)
|
|
|
(Level
3)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Investment
at fair value-securities
|
|
$
|
16,400
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
16,400
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
Assets measured at fair value
|
|
$
|
16,400
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
16,400
|
|
The
following is a reconciliation of the fair value securities for which level 3 inputs were used in determining the approximate fair
value:
|
Balance
as of May 17, 2018
|
|
$
|
130,000
|
|
|
Investment
exchanged for services
|
|
|
(80,000
|
)
|
|
Net
realized loss on asset
|
|
|
(20,000
|
)
|
|
Net
unrealized loss on asset
|
|
|
(13,600
|
)
|
|
Balance
as of September 30, 2018
|
|
$
|
16,400
|
|
|
|
|
Total
|
|
|
(Level
1)
|
|
|
(Level
2)
|
|
|
(Level
3)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Derivative
Liability
|
|
$
|
6,158,447
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
6,158,447
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
liabilities measured at fair value
|
|
$
|
6,158,447
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
6,158,447
|
|
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, 2018
|
|
$
|
5,531,183
|
|
|
Fair
Value of derivative liabilities issued
|
|
|
566,312
|
|
|
Loss
on change in derivative liability
|
|
|
60,952
|
|
|
Balance
as of September 30, 2018
|
|
$
|
6,158,447
|
|
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:
|
|
|
|
9/30/2018
|
|
|
Risk free interest rate
|
|
|
2.15% - 2.94%
|
|
|
Stock volatility factor
|
|
|
131.0% - 241.0%
|
|
|
Weighted average expected option life
|
|
|
3 months - 5 years
|
|
|
Expected dividend yield
|
|
|
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.
ORIGINCLEAR,
INC. AND SUBSIDIARIES
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS-UNAUDITED
SEPTEMBER
30, 2018
2.
|
SUMMARY
OF SIGNIFICANT ACCOUNTING POLICES (Continued)
|
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.
In
May 2014, the FASB issued ASU 2014-09, Revenue from Contracts with Customers (ASC 606), to clarify the principles of recognizing
revenue and create common revenue recognition guidance between U.S. GAAP and International Financial Reporting Standards. Under
ASC 606, revenue is recognized when a customer obtains control of promised goods or services and is recognized at an amount that
reflects the consideration expected to be received in exchange for such goods or services. In addition, ASC 606 requires disclosure
of the nature, amount, timing, and uncertainty of revenue and cash flows arising from contracts with customers. The ASC is effective
for fiscal years beginning after December 15, 2017. The Company has adopted ASC 606 beginning on January 1, 2018. The adoption
of ASC 606 did not have a significant impact on the Company’s revenue recognition policies. See Note 7 for additional disclosures
in accordance with the new revenue recognition standard.
The
Company adopted ASU 2016-01, “Financial Instruments - Overall: Recognition and Measurement of Financial Assets and Financial
Liabilities.” ASU 2016-01 requires equity 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, requires public business entities to use the exit price notion when measuring the fair value of financial instruments
for disclosure purposes, requires separate presentation of financial assets and financial liabilities by measurement category
and form of financial asset, and 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.
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.
ORIGINCLEAR,
INC. AND SUBSIDIARIES
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS-UNAUDITED
SEPTEMBER
30, 2018
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
B
On
October 1, 2015, the Company filed a Certificate of Designation for Series B preferred stock with the Secretary of State of Nevada
and the shares of Series B preferred stock were issued to the shareholders of Progressive Water Treatment, Inc. in connection
with the share exchange agreement. One third (1/3) of the shares received by the holder may be converted into common stock beginning
one (1) year after the first date on which a share of Series B preferred stock was issued (the “Original Issue Date); one
third (1/3) may be converted beginning two (2) years after the Original Issue Date; and the remaining one third (1/3) may be converted
beginning three years after the Original Issue Date. The number of shares of common stock issuable for each share of converted
Series B preferred stock shall be calculated by dividing the stated value by the market price, the market price shall be the average
of the closing trade prices of the twenty-five (25) days prior to the date of the conversion notice. On August 12, 2016, the agreement
was amended to include make-good-shares. The conversion price set forth in Section 1.2 of the agreement shall be adjusted to reflect
the lower of $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. See Note 3. 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. As of September 30, 2018, there are 3,333 shares of Series
B preferred stock outstanding.
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 September 30, 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 Series E preferred stock.
As of September 30, 2018, there were no outstanding Series D preferred stock.
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 28,500,000 preferred shares for services.
As of September 30, 2018, there were 28,500,000 shares issued and outstanding.
ORIGINCLEAR,
INC. AND SUBSIDIARIES
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS-UNAUDITED
SEPTEMBER
30, 2018
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, 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.
As of September 30, 2018, there were 2,440,871 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 September 30, 2018, the Company accrued dividends in the
amount of $1,976, and has 750 shares 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.
Nine
months ended September 30, 2018
The Company issued 292,974,292
shares of common stock for the settlement of convertible promissory notes in an aggregate principal in the amount of $524,714,
plus interest in the amount of $62,668, with an aggregate fair value loss on conversion of debt in the amount of $860,880, based
upon conversion prices of $0.0019 to $0.0329.
The
Company issued 117,724,284 shares of common stock for services at fair value of $994,689.
The
Company issued 167,265,906 shares of common stock through a private placement for purchase of Series F preferred stock.
4.
|
CONVERTIBLE
PROMISSORY NOTES
|
As
of September 30, 2018, the outstanding convertible promissory notes are summarized as follows:
|
Convertible Promissory Notes, net of debt discount
|
|
$
|
3,722,562
|
|
|
Less current portion
|
|
|
968,438
|
|
|
Total long-term liabilities
|
|
$
|
2,754,124
|
|
Maturities
of long-term debt for the next five years are as follows:
|
Period Ending
|
|
|
|
|
September 30,
|
|
Amount
|
|
|
|
|
|
|
|
|
2020
|
|
|
2,245,000
|
|
|
2021
|
|
|
325,000
|
|
|
2022
|
|
|
-
|
|
|
2023
|
|
|
184,124
|
|
|
|
|
$
|
2,754,124
|
|
ORIGINCLEAR,
INC. AND SUBSIDIARIES
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS-UNAUDITED
SEPTEMBER
30, 2018
4.
|
CONVERTIBLE
PROMISSORY NOTES (Continued)
|
At
September 30, 2018, the $4,043,854 in convertible promissory notes has a remaining debt discount of $321,292, leaving a net balance
of $3,722,562.
On various dates 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 nine months ended September 30, 2018, the Company issued 50,762,187 shares of common stock,
upon conversion of $121,600 in principal, plus accrued interest of $44,064, with a fair value loss on settlement of $328,540.
As of September 30, 2018, the 2014-2015 Notes had an aggregate remaining balance of $1,364,400.
As
of September 30, 2018, the unsecured convertible promissory notes (the “OID Notes”) had an aggregate remaining principal
balance of $184,124, plus accrued interest of $13,334 were amended. The OID Notes included an original issue discount and one
time interest, which has been fully amortized. The OID Notes matured on December 31, 2017, and were extended through September
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. As of September 30, 2018, the remaining
balance on the note was $184,124.
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 September 30, 2018, 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 September 30, 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 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. The Company recorded amortization of debt
discount, which was recognized as interest expense in the amount of $140,543 during the nine months ended September 30, 2018.
As of September 30, 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 nine months ended the Company issued 72,963,066 shares of common stock, upon conversion of principal in the
amount of $123,500, plus accrued interest of $8,033, with a fair value loss on settlement of $197,877.The Company recorded amortization
of debt discount, which was recognized as interest expense in the amount of $33,603 during the nine months ended September 30,
2018. As of September 30, 2018, the remaining balance on the note was $26,500.
ORIGINCLEAR,
INC. AND SUBSIDIARIES
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS-UNAUDITED
SEPTEMBER
30, 2018
4.
|
CONVERTIBLE
PROMISSORY NOTES (Continued)
|
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 nine months ended the Company issued 40,129,653 shares of common stock, upon conversion of principal in the
amount of $69,864, with a fair value loss on settlement of $80,509. The Company recorded amortization of debt discount, which
was recognized as interest expense in the amount of $6,450 during the nine months ended September 30, 2018. As of September
30, 2018, the remaining balance on the note was $5,136.
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
nine months ended the Company issued 97,506,179 shares of common stock, upon conversion of principal in the amount of $174,000,
plus accrued interest of $ 8,700, with a fair value loss on settlement of $175,027. The Company recorded amortization of debt discount,
which was recognized as interest expense in the amount of $201,834 during the nine months ended September 30, 2018. As of
September 30, 2018, the balance remaining on the Jan-Aug 2018 Notes was $119,000.
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 nine months ended September 30, 2018, the Company issued 31,613,207 shares of common stock, upon conversion of principal
in the amount of $35,750, plus accrued interest of $1,872, with a fair value loss on settlement of $78,927. The Company recorded
amortization of debt discount, which was recognized as interest expense in the amount of $34,065 during the nine months ended
September 30, 2018. As of September 30, 2018, the balance remaining on the Feb 2018 Notes was $121,750.
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. The Company recorded amortization
of debt discount, which was recognized as interest expense in the amount of $67,082 during the nine months ended September 30, 2018. As of September 30, 2018, the remaining balance on the Apr & May 2018 Notes were
$300,000.
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 September 30, 2018 was $6,158,447.
ORIGINCLEAR,
INC. AND SUBSIDIARIES
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS-UNAUDITED
SEPTEMBER
30, 2018
|
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 nine months ended September 30, 2018, as a result of the convertible notes (“Notes”) issued that were accounted
for as derivative liabilities, we determined that the fair value of the conversion feature of the convertible notes at issuance
was $566,312, based upon a Binomial-Model calculation. We recorded the full value of the derivative as a liability at issuance
with an offset to valuation discount, which will be amortized over the life of the Notes.
During
the nine months ended September 30, 2018, the Company converted $524,714 in principal of convertible promissory notes, plus accrued
interest of $62,668. 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 $860,880 in the statement of operations for the nine months ended September
30, 2018. At September 30, 2018, the fair value of the derivative liability was $6,158,447.
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:
|
|
|
|
9/30/2018
|
|
|
Risk
free interest rate
|
|
|
2.15%
- 2.94%
|
|
|
Stock
volatility factor
|
|
|
131.0%
- 241.0.0%
|
|
|
Weighted average expected
option life
|
|
|
3
months - 5 years
|
|
|
Expected
dividend yield
|
|
|
None
|
|
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, which reserves and sets aside for the granting of options for 3,614,285 shares of common
stock. 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. Each option shall be exercisable to the nearest whole share, in installments or
otherwise, as the respective option agreements may provide. Notwithstanding any other provision of the Plans or of any option
agreement, each option shall expire on the date specified in the option agreement, which date shall not be later than the fifth
(5th) anniversary from the effective date of grant. Each option shall be exercisable to the nearest whole share, in installments
or otherwise, as the respective option agreements may provide. The stock options mature on July 5, 2019 through October 17, 2021,
at exercise prices of $1.31 and $31.15.
With
respect to Non-Statutory Options granted to employees, directors or consultants, the Board of Directors or Committee of the Board
of Directors may specify such period for exercise that the option shall automatically terminate following the termination of employment
or services as to shares covered by the option as the Board of Directors or Committee of the Board of Directors deems reasonable
and appropriate.
A
summary of the Company’s stock option activity and related information follows:
|
|
|
September
30, 2018
|
|
|
|
|
|
|
|
Weighted
|
|
|
|
|
Number of
|
|
|
average
exercise
|
|
|
|
|
Options
|
|
|
price
|
|
|
Outstanding,
beginning of period
|
|
|
3,697,495
|
|
|
$
|
1.51
|
|
|
Granted
|
|
|
-
|
|
|
|
-
|
|
|
Exercised
|
|
|
-
|
|
|
|
-
|
|
|
Forfeited/Expired
|
|
|
(88,352
|
)
|
|
$
|
0.91
|
|
|
Outstanding,
end of period
|
|
|
3,609,143
|
|
|
$
|
1.31
|
|
|
Exercisable
at the end of the period
|
|
|
2,685,690
|
|
|
$
|
1.03
|
|
|
Weighted
average fair value of options granted during the period
|
|
|
|
|
|
$
|
-
|
|
ORIGINCLEAR,
INC. AND SUBSIDIARIES
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS-UNAUDITED
SEPTEMBER
30, 2018
|
6.
|
OPTIONS
AND WARRANTS (Continued)
|
Options
(Continued)
The
weighted average remaining contractual life of options outstanding issued under the Plan as of September 30, 2018 was as follows:
|
|
|
|
|
|
|
|
|
|
Weighted Average
|
|
|
|
|
|
Stock
|
|
|
Stock
|
|
|
Remaining
|
|
|
Exercisable
|
|
|
Options
|
|
|
Options
|
|
|
Contractual
|
|
|
Prices
|
|
|
Outstanding
|
|
|
Exercisable
|
|
|
Life (years)
|
|
|
$
|
6.65
|
|
|
|
18,571
|
|
|
|
18,571
|
|
|
|
6.02
|
|
|
$
|
31.15
|
|
|
|
9,143
|
|
|
|
9,143
|
|
|
|
3.84 - 3.92
|
|
|
$
|
1.31
|
|
|
|
3,581,429
|
|
|
|
2,657,976
|
|
|
|
2.02 – 2.50
|
|
|
|
|
|
|
|
3,609,143
|
|
|
|
2,685,690
|
|
|
|
|
|
Stock-based
compensation expense recognized during the year is based on the value of the portion of stock-based payment awards that is ultimately
expected to vest. Stock-based compensation expense recognized in the financial statements of operations during the nine months
ended September 30, 2018 and 2017 were $38,361 and $71,603, respectively.
Restricted
Stock to CEO
On
May 12, 2016, the Company entered into a Restricted Stock Grant Agreement (the “RSGA”) with its Chief Executive Officer,
Riggs Eckelberry, to create management incentives to improve the economic performance of the Company and to increase its value
and stock price. All shares issuable under the RSGA are performance based shares and none have yet vested nor have any been issued.
The RSGA 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.
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.
ORIGINCLEAR,
INC. AND SUBSIDIARIES
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS-UNAUDITED
SEPTEMBER
30, 2018
|
6.
|
OPTIONS
AND WARRANTS (Continued)
|
Restricted
Stock to CEO
(Continued)
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.
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 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 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.
ORIGINCLEAR,
INC. AND SUBSIDIARIES
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS-UNAUDITED
SEPTEMBER
30, 2018
|
6.
|
OPTIONS
AND WARRANTS (Continued)
|
Restricted
Stock to Employees and Consultants
(Continued)
On
November 10, 2017, the Company entered into a Restricted Stock Grant Agreement (the “Third Employee RSGA”) with nine
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 Second Consultants RSGA are performance based shares and none have yet
vested nor have any been issued. The Second Consultants RSGA provides to the respective consultants the issuance of an aggregate
of 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 respective consultants an aggregate
of 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 an aggregate of 1,000,000 shares to the respective 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.
On
May 16, 2018, the Company entered into a Restricted Stock Grant Agreement (the “Employee and Consultant RSGA”) with
one of its’ 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 respective
consultants in various amounts 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 an aggregate of 2,000,000 shares
of its common stock to the respective employee and consultant, in various amounts 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 “Employees and Consultants RSGA”)
with two of its’ consultants and 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 Employees and Consultants RSGA are performance
based shares and none have yet vested nor have any been issued. The Employees and Consultants RSGA provides to the employees 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 respective 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 an aggregate
of 4,250,000 shares of its common stock to respective consultants, in various amounts 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
SEPTEMBER
30, 2018
|
6.
|
OPTIONS
AND WARRANTS (Continued)
|
Restricted
Stock to Employees and Consultants
(Continued)
On
September 28, 2018, the Company entered into a Restricted Stock Grant Agreement (the “Sep 2018 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 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 respective 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 an aggregate of 13,500,000 shares of its common stock to respective
consultants, in various amounts 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.
Warrants
As
of September 30, 2018, the Company issued no warrants during the period. A summary of the Company’s warrant activity and
related information follows for the nine months ended September 30, 2018:
|
|
|
September
30, 2018
|
|
|
|
|
|
|
|
Weighted
|
|
|
|
|
Number
|
|
|
average
|
|
|
|
|
of
|
|
|
exercise
|
|
|
|
|
Warrants
|
|
|
price
|
|
|
Outstanding
-beginning of the period
|
|
|
53,562,961
|
|
|
$
|
5.40
|
|
|
Granted
|
|
|
244,087,101
|
|
|
|
-
|
|
|
Exercised
|
|
|
-
|
|
|
|
-
|
|
|
Forfeited
|
|
|
(36,500,649
|
)
|
|
$
|
(0.093
|
)
|
|
Outstanding
- end of the period
|
|
|
261,149,413
|
|
|
$
|
0.0018
|
|
At
September 30, 2018, the weighted average remaining contractual life of warrants outstanding:
|
|
|
|
|
|
|
|
|
|
Weighted
|
|
|
|
|
|
|
|
|
|
|
|
Average
|
|
|
|
|
|
|
|
|
|
|
|
Remaining
|
|
|
Exercisable
|
|
|
Warrants
|
|
|
Warrants
|
|
|
Contractual
|
|
|
Prices
|
|
|
Outstanding
|
|
|
Exercisable
|
|
|
Life
(years)
|
|
|
$
|
0.080
|
|
|
|
10,237,388
|
|
|
|
10,237,388
|
|
|
|
0.17
|
|
|
$
|
0.012
|
|
|
|
6,824,924
|
|
|
|
6,824,924
|
|
|
|
0.67
|
|
|
$
|
0.250
|
|
|
|
244,087,101
|
|
|
|
244,087,101
|
|
|
|
2.87
|
|
|
|
|
|
|
|
261,149,413
|
|
|
|
261,149,413
|
|
|
|
|
|
At
September 30, 2018, 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.
ORIGINCLEAR,
INC. AND SUBSIDIARIES
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS-UNAUDITED
SEPTEMBER
30, 2018
|
7.
|
REVENUE
FROM CONTRACTS WITH CUSTOMERS (Continued)
|
Equipment
Contracts
(Continued)
The
following table represents a disaggregation of revenue by type of good or service from contracts with customers for the six months
ended September 30, 2018 and 2017.
|
|
|
Nine
Months Ended
|
|
|
|
|
September
30, 2018
|
|
|
|
|
2018
|
|
|
2017
|
|
|
Equipment
Contracts
|
|
$
|
2,486,426
|
|
|
$
|
1,325,617
|
|
|
Component
Sales
|
|
|
1,003,879
|
|
|
|
896,333
|
|
|
Services
Sales
|
|
|
157,956
|
|
|
|
61,941
|
|
|
Licensing
Fees
|
|
|
30,000
|
|
|
|
11,000
|
|
|
|
|
$
|
3,678,261
|
|
|
$
|
2,294,891
|
|
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 nine months ending September 30, 2018 was $36,761 and for the year ending
December 31, 2017 was $88,589. The contract liability for the nine months ending September 30, 2018 was $250,184 and for the year
ending December 31, 2017 was $154,048.
During
the period ended September 30, 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.
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. As of September 30, 2018, the note included principal of $80,000 plus accrued
interest of $2,883.
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. During the period ended September 30, 2018, the Company exchanged the shares for services in the
amount of $80,000, incurring a loss on investment of $20,000.
|
|
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 September 30, 2018, the fair value of the preferred shares was $16,400.
|
ORIGINCLEAR,
INC. AND SUBSIDIARIES
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS-UNAUDITED
SEPTEMBER
30, 2018
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 range from two months to six months. The net balance as of September 30, 2018 was $698,771, the finance cost of $378,775.
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 September 30, 2018, the maturities are summarized as follows:
|
Promissory note payable
|
|
$
|
74,995
|
|
|
Less current portion
|
|
|
93
|
|
|
Long term portion
|
|
$
|
74,902
|
|
|
|
|
|
|
|
|
Long term maturities for the next five years are as follows:
|
|
|
|
|
|
2019
|
|
$
|
181
|
|
|
2020
|
|
|
355
|
|
|
2021
|
|
|
693
|
|
|
2022
|
|
|
1,356
|
|
|
2023 thru 2028
|
|
|
72,317
|
|
|
|
|
$
|
74,902
|
|
10.
|
LOANS PAYABLE – RELATED PARTY
|
The Company’s CEO loaned the Company $248,870 during the nine months ended September 30, 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 $13,626, leaving a balance of $235,243 as of September 30,
2018.
The
Company entered into a capital lease for the purchase of equipment during the nine months ended September 30, 2018. The lease
is for a sixty (60) month term, with a purchase option at the end of the lease for $1.00.
As
of September 30, 2018, the maturities are summarized as follows:
|
Capital
lease
|
|
$
|
38,278
|
|
|
Less
current portion
|
|
|
9,088
|
|
|
Total
long-term liabilities
|
|
$
|
29,190
|
|
Long
term maturities for the next four years are as follows:
|
Period Ending
September 30,
|
|
2019
|
|
$
|
2,272
|
|
|
2020
|
|
|
9,088
|
|
|
2021
|
|
|
9,088
|
|
|
2022
|
|
|
8,742
|
|
|
|
|
$
|
29,190
|
|
ORIGINCLEAR,
INC. AND SUBSIDIARIES
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS-UNAUDITED
SEPTEMBER
30, 2018
12.
|
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.
Operating
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. 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 September
30, 2018 is $40,551.
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
October 3, 2018 and November 8, 2018, holders of convertible promissory notes converted an aggregate principal and interest amount
of $307,250 into an aggregate of 492,630,452 shares of the Company’s common stock.
Between
October 23, 2018 and October 31, 2018, the Company issued to consultants an aggregate of 45,673,913 shares of the Company’s
common stock for services.
In
connection with certain one-time make good agreements, on October 31, 2018, the Company issued an aggregate of 12,413,226 shares
of its common stock to certain holders of its common stock.
Between
October 2, 2018 and November 6, 2018, the Company entered into subscription agreements with certain accredited investors pursuant
to which the Company sold an aggregate of 616 of the Company’s Series F preferred stock for an aggregate purchase price
of $616,000.
In
connection with the Series F Certificate of Designation and subscription agreements entered into with investors, between October
2, 2018 and November 6, 2018, the Company issued an aggregate of 168,435,051 shares of its common stock to certain holders of
its Series F preferred stock.