ORIGINCLEAR, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS-UNAUDITED
MARCH 31, 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 three months ended March 31, 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 restrictions on our operations, in the case of debt financing, or cause
substantial dilution for our stockholders, in case of equity financing.
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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.
Three Months Ended March
31, 2019
The Company has excluded 250,912,025
shares of common stock issuable pursuant to outstanding warrants, shares of common stock issuable pursuant to outstanding convertible
debt of $3,799,009, and shares issuable from convertible preferred stock for the three months ended March 31, 2019, because their
impact on the loss per share is anti-dilutive.
Three Months Ended March
31, 2018
The Company has excluded 3,714,637
shares of common stock issuable pursuant to outstanding stock options, 40,931,531 shares of common stock issuable pursuant to outstanding
warrants, shares of common stock issuable pursuant to outstanding convertible debt of $3,543,068 and shares of common stock issuable
pursuant to outstanding convertible preferred stock for the three months ended March 31, 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.
ORIGINCLEAR, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS-UNAUDITED
MARCH 31, 2019
2.
|
SUMMARY OF SIGNIFICANT
ACCOUNTING POLICES (Continued)
|
Use of Estimates
The preparation of financial
statements in conformity with accounting principles generally accepted in the United States of America requires management to
make estimates and assumptions that affect the reported amounts of assets and liabilities, disclosure of contingent assets and
liabilities at the date of the financial statements, and the reported amounts of revenues and expenses during the reporting period.
Actual results could differ from those estimates. Significant estimates include estimates used to review the Company’s impairments
and estimations of long-lived assets, revenue recognition on percentage of completion type contracts, allowances for uncollectible
accounts, warranty reserves, inventory valuation, 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 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.
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 March 31, 2019
and December 31, 2018, respectively. The net contract receivable balance was $289,689 and $309,223 at March 31, 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 March 31, 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.
ORIGINCLEAR, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS-UNAUDITED
MARCH 31, 2019
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:
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●
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Level 1, defined as observable inputs such as quoted prices for identical instruments in active markets;
|
|
●
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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.
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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 March
31, 2019.
|
|
Total
|
|
|
(Level 1)
|
|
|
(Level 2)
|
|
|
(Level 3)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Investment at fair value-securities
|
|
$
|
15,600
|
|
|
$
|
15,600
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Assets measured at fair value
|
|
$
|
15,600
|
|
|
$
|
15,600
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
|
Total
|
|
|
(Level 1)
|
|
|
(Level 2)
|
|
|
(Level 3)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Derivative Liability
|
|
$
|
7,415,615
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
7,415,615
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total liabilities measured at fair value
|
|
$
|
7,415,615
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
7,415,615
|
|
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
|
|
|
-
|
|
Gain on net change in derivative liability
|
|
|
(1,944,589
|
)
|
Balance as of March 31, 2019
|
|
$
|
7,415,615
|
|
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:
|
|
3/31/19
|
|
Risk free interest rate
|
|
|
2.21% - 2.60%
|
|
Stock volatility factor
|
|
|
40.0% - 270.0%
|
|
Weighted average expected option life
|
|
|
3 months - 5 years
|
|
Expected dividend yield
|
|
|
None
|
|
ORIGINCLEAR, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS-UNAUDITED
MARCH 31, 2019
2.
|
SUMMARY OF SIGNIFICANT ACCOUNTING POLICES (Continued)
|
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.
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 effect on the Company’s 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 financial statements, which had no material effect.
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 impact of
the adoption of ASU 2018-07 on the Company’s financial statements did not have a material impact.
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.
Reclassification of Expenses
During the period, the Company
reclassified certain expenses in the prior period ended March 31, 2018 to conform to the current period. There was no material
effect to the financial statements.
ORIGINCLEAR, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS-UNAUDITED
MARCH 31, 2019
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 the greater of (A) one share of common stock and (B) the number of shares of common stock the holder would have received
pursuant to each holder’s respective subscription agreement if the Series D-1 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 $0.005 (1/2 of one cent). 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’ notice. The Company issued an aggregate of 38,500,000 Series D-1 preferred shares for services. As of March
31, 2019, there were 38,500,000 Series D-1 preferred shares issued and outstanding.
Series E
On
August 14, 2018, the Company filed a Certificate of Designation for its 0% Series E Convertible preferred stock (the “Series
E preferred stock”) with the Secretary of State of Nevada designating 4,000,000 shares of its authorized preferred stock
as Series E preferred stock. 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 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’ notice. 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. As of March 31 2019, there were 2,139,649 shares of Series E preferred stock 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 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 Series F preferred stock is not convertible into common stock. The shares of Series F preferred stock
do not carry any voting rights. The holders of Series F Preferred Stock will be entitled to receive, of any funds and assets of
the Company legally available prior and in preference to any declaration or payment of any dividend on the common stock, cumulative
dividends, payable quarterly (at the end of each fiscal quarter, and due for such fiscal quarter within fifteen days of the end
of such fiscal quarter), at an annual rate of 8% of the stated value. 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. During the period ended March 31, 2019, 65 shares
of Series F were redeemed for a value of $65,000. As of March 31, 2019, the Company accrued dividends in the amount of $33,560.
As of March 31, 2019, there were 1,678 shares of Series F preferred stock issued and outstanding.
ORIGINCLEAR, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS-UNAUDITED
MARCH 31, 2019
|
3.
|
CAPITAL STOCK (Continued)
|
Preferred
Stock
(Continued)
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, and pursuant to certain subscription agreements entered into with purchasers of the Series G preferred stock, each purchaser
shall receive shares of the Company’s common stock equal to an amount of, for each share of Series G preferred stock purchased,
five hundred dollars ($500) divided by the closing price on the date the Company receives the executed subscription documents and
purchase price from such investor. Between January 16, 2019 and March 20, 2019, the Company entered into subscription agreements
with certain accredited investors pursuant to which the Company sold an aggregate of 530 shares of the Company’s Series G
preferred stock for an aggregate purchase price of $530,000. As of March 31, 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 March 31, 2019, the Company accrued dividends in the amount of $4,596.
Common Stock
On August 9, 2018, the Company
and Board of Directors increased the aggregate number of authorized shares of common stock of the Company to 8,000,000,000
shares from 2,000,000,000 shares.
Three months ended March
31, 2019
The Company issued 626,028,089
shares of common stock upon conversion of convertible promissory notes in an aggregate principal in the amount of $284,973, and
a default settlement of $40,500, plus interest in the amount of $51,578, with an aggregate fair value loss on conversion of debt
in the amount of $514,404, based upon conversion prices of $0.0009 to $0.0018.
The
Company issued 233,078,882 shares of common stock for services at fair value of $279,229.
The
Company issued 165,598,887 shares of common stock through a private placement for purchase of Series G preferred stock.
Three months ended March
31, 2018
The Company issued 7,442,162
shares of common stock upon conversion of convertible promissory notes in an aggregate principal in the amount of $50,000, plus
interest in the amount of $16,979, with an aggregate fair value loss on conversion of debt in the amount of $126,330, based upon
conversion prices of $0.019 to $0.0329.
The
Company issued 15,256,054 shares of common stock for services at fair value of $402,512.
|
4.
|
CONVERTIBLE
PROMISSORY NOTES
|
As of March 31, 2019, the outstanding
convertible promissory notes are summarized as follows:
Convertible Promissory Notes, net of debt discount
|
|
$
|
3,785,481
|
|
Less current portion
|
|
|
2,717,353
|
|
Total long-term liabilities
|
|
$
|
1,068,128
|
|
Maturities of long-term debt
for the next five years are as follows:
Period Ending March 31, 2019
|
|
Amount
|
|
2020
|
|
|
2,717,353
|
|
2021
|
|
|
970,000
|
|
2022
|
|
|
25,000
|
|
2023
|
|
|
73,128
|
|
|
|
$
|
3,785,481
|
|
ORIGINCLEAR, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS-UNAUDITED
MARCH 31, 2019
4.
|
CONVERTIBLE PROMISSORY NOTES (Continued)
|
At March 31, 2019, the $3,799,009
in convertible promissory notes has a remaining debt discount of $13,528, leaving a net balance of $3,785,481.
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 year. 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 three months ended March 31, 2019, the Company issued 240,595,661 shares of common stock, upon
conversion of $86,800 in principal, plus accrued interest of $37,989, with a fair value loss on settlement of $190,873. As of March
31, 2019, the Notes had an aggregate remaining balance of $1,192,500.
As of March 31, 2019, 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. As of March
31, 2019, the remaining balance on the notes 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 year. 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 March 31, 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 March 31, 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 March 31, 2019, the remaining balance on the Sep 2016 Note
was $430,896.
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 year. 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 three months ended March 31, 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 three months ended March 31, 2019. As of March
31, 2019, the Jan-Aug 2018 Notes were fully converted.
ORIGINCLEAR, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS-UNAUDITED
MARCH 31, 2019
4.
|
CONVERTIBLE PROMISSORY NOTES (Continued)
|
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 year. 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 March 31,
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 as of date of settlement), based on the outstanding balance due and payable under the Notes. During the three months
ended March 31, 2019, the Company issued 72,182,282 shares of common stock, upon conversion of principal in the amount of $40,550,
plus accrued interest of $2,759, with a fair value loss on settlement of $81,469. The Company recorded amortization of debt discount,
which was recognized as interest expense in the amount of $50,702 during the three months ended March 31, 2019. As of March
31, 2019, the remaining balance on the Feb 2018 Notes were $20,275.
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 year. 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 three months
ended March 31, 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 $39,128 during the three months ended March 31,
2019. As of March 31, 2019, the remaining balance on the Apr & May 2018 Notes were $515,162.
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. The Company recorded amortization
of debt discount, which was recognized as interest expense in the amount of $387 during the three months ended March 31, 2019. As
of March 31, 2019, the remaining balance on the Nov 2018 Note was $75,000.
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 March 31, 2019 was $7,415,615.
ORIGINCLEAR, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS-UNAUDITED
MARCH 31, 2019
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 three months ended
March 31, 2019, the Company converted $287,973 in principal of convertible promissory notes, plus accrued interest of $51,378,
and a loss on settlement of debt in the amount of $40,500. 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 $514,404 in the statement of operations
for the three months ended March 31, 2019. At March 31, 2019, the fair value of the derivative liability was $7,415,615.
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:
|
|
3/31/19
|
|
Risk free interest rate
|
|
|
2.21% - 2.60%
|
|
Stock volatility factor
|
|
|
40.0% - 270.0%
|
|
Weighted average expected option life
|
|
|
3 months - 5 years
|
|
Expected dividend yield
|
|
|
None
|
|
ORIGINCLEAR, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS-UNAUDITED
MARCH 31, 2019
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 to Mr. Eckelberry 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.
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.
ORIGINCLEAR, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS-UNAUDITED
MARCH 31, 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 “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.
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.
ORIGINCLEAR, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS-UNAUDITED
MARCH 31, 2019
6.
|
RESTRICTED STOCK
AND WARRANTS (Continued)
|
Restricted Stock to Employees
and Consultants
(Continued)
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.
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 March 31, 2019, the Company
issued no warrants during the period. A summary of the Company’s warrant activity and related information follows for the
three months ended March 31, 2019:
|
|
March 31, 2019
|
|
|
|
|
|
|
Weighted
|
|
|
|
Number
|
|
|
average
|
|
|
|
of
|
|
|
exercise
|
|
|
|
Warrants
|
|
|
price
|
|
Outstanding - beginning of the period
|
|
|
250,912,025
|
|
|
$
|
5.40
|
|
Granted
|
|
|
-
|
|
|
|
-
|
|
Exercised
|
|
|
-
|
|
|
|
-
|
|
Forfeited
|
|
|
|
|
|
|
|
|
Outstanding - end of the period
|
|
|
250,912,025
|
|
|
$
|
5.40
|
|
ORIGINCLEAR, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS-UNAUDITED
MARCH 31, 2019
6.
|
RESTRICTED STOCK
AND WARRANTS (Continued)
|
Warrants
(Continued)
At March 31, 2019, the weighted average remaining
contractual life of warrants outstanding:
|
|
|
|
|
|
|
|
|
Weighted
|
|
|
|
|
|
|
|
|
|
|
Average
|
|
|
|
|
|
|
|
|
|
|
Remaining
|
|
Exercisable
|
|
|
Warrants
|
|
|
Warrants
|
|
|
Contractual
|
|
Prices
|
|
|
Outstanding
|
|
|
Exercisable
|
|
|
Life (years)
|
|
$
|
0.012
|
|
|
|
6,824,924
|
|
|
|
6,824,924
|
|
|
|
0.17
|
|
$
|
0.250
|
|
|
|
244,087,101
|
|
|
|
244,087,101
|
|
|
|
2.37
|
|
|
|
|
|
|
250,912,025
|
|
|
|
250,912,025
|
|
|
|
|
|
At March 31, 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 three months ended March 31, 2019
and 2018.
|
|
Three Months Ended
|
|
|
|
March 31,
|
|
|
|
2019
|
|
|
2018
|
|
Equipment Contracts
|
|
$
|
446,233
|
|
|
$
|
984,754
|
|
Component Sales
|
|
|
263,259
|
|
|
|
307,445
|
|
Services Sales
|
|
|
32,551
|
|
|
|
11,340
|
|
Licensing Fees
|
|
|
-
|
|
|
|
30,000
|
|
|
|
$
|
742,043
|
|
|
$
|
1,333,539
|
|
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 three months ending March 31, 2019 was $104,383 and for the year ending December 31, 2018 was $111,001.
The contract liability for the three months ending March 31, 2019 was $132,391 and for the year ending December 31, 2018 was $112,894.
Convertible Note Receivable
On May 22, 2018, 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 March 31, 2019, the issuer defaulted on the
convertible note, and was charged $16,980 in interest for the period. As of March 31, 2019, the note included principal of $80,000
plus accrued interest of $23,935.
ORIGINCLEAR, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS-UNAUDITED
MARCH 31, 2019
8.
|
FINANCIAL ASSETS (Continued)
|
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 March 31, 2019, the fair value of the preferred shares
was $15,600.
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 balance as of
March 31, 2019 was $555,215, less finance cost of $12,566 for a net balance of $542,649.
10.
|
RELATED PARTY LOANS PAYABLE
|
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 March 31, 2019, the maturities are summarized
as follows:
Promissory note payable
|
|
$
|
74,956
|
|
Less current portion
|
|
|
110
|
|
Long term portion
|
|
$
|
74,846
|
|
|
|
|
|
|
Long term maturities for the next five years are as follows:
|
|
|
|
|
2020
|
|
$
|
110
|
|
2021
|
|
|
214
|
|
2022
|
|
|
419
|
|
2023
|
|
|
820
|
|
2024 through 2028
|
|
|
73,393
|
|
|
|
$
|
74,956
|
|
ORIGINCLEAR, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS-UNAUDITED
MARCH 31, 2019
10.
|
RELATED PARTY LOANS PAYABLE (Continued)
|
LOANS PAYABLE – RELATED PARTY
The Company’s CEO loaned the Company $248,870 during the year ended
December 31, 2018. The loans bear interest at various rates to be at various maturity dates. The funds were used for operating
expenses. The principal balance as December 31, 2018 was $219,841. During the three months ended March 31, 2019, the Company made
principal payments in the amount of $15,674, leaving a balance of $204,167 as of March 31, 2019.
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 March 31, 2019 is $33,734.
As of March 31, 2019, the maturities
are summarized as follows:
|
|
|
|
Capital lease
|
|
$
|
33,734
|
|
Less current portion
|
|
|
9,088
|
|
Total long-term liabilities
|
|
$
|
24,646
|
|
Long term maturities for the
next four years are as follows:
Period Ending March 31,
|
2019
|
|
$
|
9,088
|
|
2020
|
|
|
9,088
|
|
2021
|
|
|
9,088
|
|
2022
|
|
|
6,470
|
|
|
|
$
|
33,734
|
|
|
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.
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.
ORIGINCLEAR, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS-UNAUDITED
MARCH 31, 2019
Management has evaluated subsequent
events according to the requirements of ASC TOPIC 855 and has determined that there are the following subsequent events:
On April 3, 2019, the “Company
filed a certificate of designation (the “Series I COD”) of Series I Preferred Stock (the “Series I”) and
a certificate of designation (the “Series J COD”) of Series J Preferred Stock (the “Series J”). Pursuant
to the Series I COD, the Company designated 4,000 shares of preferred stock as Series I. The Series I will have a stated value
of $1,000 per share, and will be entitled to cumulative dividends at the annual rate of 8% of the stated value, payable quarterly
within 60 days from the end of such fiscal quarter. The Series I will not be entitled to any voting rights except as may be required
by applicable law, and will not be convertible into common stock. The Company will have the right to redeem the Series I at any
time while the Series I are outstanding at a price equal to the stated value plus any accrued but unpaid dividends. The Company
will be required to redeem the Series I two years following the date that is the later of the (i) final closing of the tranche
(as designated in the applicable subscription agreement) or (ii) the expiration date of the tranche that such shares to be redeemed
were a part of. Pursuant to the Series J COD, the Company designated 100,000 shares of preferred stock as Series J. The Series
J will have a stated value of $1,000 per share, and will be entitled to receive dividends on an as-converted basis with the Company’s
common stock. The Series J will be convertible into validly-issued, fully paid and non-assessable shares of the Company’s
common stock, on the terms and conditions set forth in the Series J COD, which includes certain Make-Good Shares for certain holders
of the Company’s previously disclosed Series F Preferred Stock and Series G Preferred Stock.
Between April 4, 2019 and May
13, 2019, the Company entered into subscription agreements with certain accredited investors pursuant to which the Company sold
an aggregate of 615 shares of the Company’s Series I preferred stock for an aggregate purchase price of $615,000. The Company
also issued an aggregate of 307.5 shares of its Series J preferred stock to the investors.
On April 19, 2019, the Company
entered into Restricted Stock Grant Agreements (the “April RSGAs”) with its Chief Executive Officer, Riggs Eckelberry,
three members of the Board and five consultants to create management incentives to improve the economic performance of the Company
and to increase its value and stock price. All shares issuable under the April RSGAs are performance based shares and none have
yet vested nor have any been issued. The April RSGAs provide for the issuance of up to an aggregate of 90,000,000 shares of the
Company’s common stock as follows: 30,000,000 to the CEO, 5,000,000 to each of the other three members of the Board and an
aggregate of 45,000,000 to five consultants provided certain milestones are met in certain stages; a) If the Company’s consolidated
gross revenue, calculated in accordance with generally accepted accounting principles, consistently applied, equals or exceeds
$15,000,000 for the trailing twelve month period, the Company will issue up to an aggregate of 45,000,000 shares of its common
stock; b) If the Company’s consolidated operating profit (
Operating Profit = Operating Revenue - Cost of Goods Sold -
Operating Expenses - Depreciation & Amortization),
calculated in accordance with generally accepted accounting principles,
equals or exceeds $1,500,000 for the trailing twelve month period as reported as reported in the Company’s SEC reports, the
Company will issue up to an aggregate of 45,000,000 shares of its common stock. As the performance goals are achieved, the shares
shall become eligible for vesting and issuance.
On April 23, 2019, the Company
filed a Certificate of Amendment to its Articles of Incorporation, as amended, with the Secretary of State of the State of Nevada
to effectuate an increase to the number of authorized shares of common stock of the Company from 8,000,000,000 to 16,000,000,000.
Between April 23, 2019 and May
6, 2019, holders of convertible notes, known in our filings as “Convertible Promissory Notes” converted an aggregate
outstanding principal and interest amount of $86,390 into an aggregate of 228,235,283 shares of the Company’s common stock.
In connection with certain one-time
make good agreements, on April 30, 2019, the Company issued an aggregate of 9,178,744 shares of its common stock to certain holders
of its common stock.
Between April 17, 2019 and April
30, 2019, the Company issued to consultants an aggregate of 43,888,889 shares of the Company’s common stock in lieu of cash
considerations.