The accompanying notes are an integral part of these unaudited
condensed consolidated financial statements
The accompanying notes are an integral part of these unaudited
condensed consolidated financial statements
The accompanying notes are an integral part of these unaudited
condensed consolidated financial statements
The accompanying notes are an integral part of these unaudited condensed consolidated financial statements
NOTES TO CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS – (UNAUDITED)
THREE MONTHS ENDED MARCH 31, 2016
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, 2016 are not necessarily indicative of the results that may be expected for the year
ending December 31, 2016. 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, 2015.
Going Concern
The accompanying 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 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 has
not generated significant revenue, 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 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 consolidated
financial statements include the accounts of OriginClear, Inc. and its wholly owned operating subsidiaries, Progressive Water
Treatment, Inc., (PWT) and OriginClear (HK) Company, Ltd. All material intercompany transactions have been eliminated upon
consolidation of these entities.
Revenue Recognition
Equipment sales
We recognize revenue upon delivery
of equipment, provided that evidence of an arrangement exists, title, and risk of loss have passed to the customer, fees are fixed
or determinable, and collection of the related receivable is reasonably assured. Title to the equipment is transferred
to the customer once the last payment is received. We record revenue as goods are shipped, and the equipment has been fully accepted
by the customer. Generally, we extend credit to our customers and do not require collateral. We do not ship a product
until we have a purchase agreement signed by the customer with a payment arrangement.
Percentage of completion
Revenues and related costs on construction
contracts are recognized using the “percentage of completion method” of accounting in accordance with ASC 605-35 –
“
Accounting for Performance of Construction-Type and Certain Production Type Contracts”.
Under this method,
contract revenues and related expenses are recognized over the performance period of the contract in direct proportion to the costs
incurred as a percentage of total estimated costs for the entirety of the contract. Costs include direct material, direct labor,
subcontract labor and any allocable indirect costs. All un-allocable indirect costs and corporate general and administrative costs
are charged to the periods as incurred. However, in the event a loss on a contract is foreseen, the Company will recognize the
loss as it is determined.
The asset “Costs in excess
of billings” represents revenues recognized in excess of amounts billed on contracts in progress. The liability “Billings
in excess of costs” represents billings in excess of revenues recognized on contracts in progress. Assets and liabilities
related to long-term contracts are included in current assets and current liabilities in the accompanying balance sheets, as they
will be liquidated in the normal course of the contract completion.
Revisions in cost and profit estimates
during the course of the contract are reflected in the accounting period in which the facts for the revisions become known. Provisions
for estimated losses on uncompleted contracts are made in the period in which such losses are determined. Changes in job performance,
job conditions, and estimated profitability, including those arising from contract penalty provisions, and final contract settlements,
may result in revisions to costs and income, which are recognized in the period the revisions are determined.
ORIGINCLEAR, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS – (UNAUDITED)
THREE MONTHS ENDED MARCH 31, 2016
2.
|
SUMMARY OF SIGNIFICANT ACCOUNTING POLICES (Continued)
|
Contract Receivable
The Company bills its customers
in accordance with contractual agreements. The agreements generally require billing to be on a progressive basis as work is completed.
Credit is extended based on evaluation of clients financial condition and collateral is not required. The Company maintains an
allowance for doubtful accounts for estimated losses that may arise if any customer is unable to make required payments. Management
performs a quantitative and qualitative review of the receivables past due from customers on a monthly basis. The Company records
an allowance against uncollectible items for each customer after all reasonable means of collection have been exhausted, and the
potential for recovery is considered remote. The allowance for doubtful accounts was approximately $50,000 as of March 31, 2016
and December 31, 2015, respectively. The net contract receivable balance was $1,176,992 and $1,066,223 at March 31, 2016 and December
31, 2015, respectively, due to the acquisition of PWT.
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.
On September 29, 2015, the Company
adopted and approved a new incentive stock option plan and reserved 8,000,000 shares of common stock at par value $0.0001 per share
of the Corporation for issuance.
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, 2016, the balances reported for cash, prepaid expenses, accounts payable, and accrued expenses approximate
the fair value because of their short maturities.
We adopted ASC Topic 820 for financial
instruments measured as fair value on a recurring basis. ASC Topic 820 defines fair value, established a framework for measuring
fair value in accordance with accounting principles generally accepted in the United States and expands disclosures about fair
value measurements.
Fair value is defined as the price
that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at
the measurement date. ASC Topic 820 established a three-tier fair value hierarchy which prioritizes the inputs used in measuring
fair value. The hierarchy gives the highest priority to unadjusted quoted prices in active markets for identical assets or liabilities
(level 1measurements) 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 liabilities of the
Company’s financial assets measured and recorded at fair value on the Company’s balance sheets on a recurring basis
and their level within the fair value hierarchy as of March 31, 2016:
|
|
|
Total
|
|
|
(Level 1)
|
|
|
(Level 2)
|
|
|
(Level 3)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Derivative Liability
|
|
$
|
7,122,416
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
7,122,416
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total liabilities measured at fair value
|
|
$
|
7,122,416
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
7,122,416
|
|
The following is a reconciliation
of the derivative liability for which Level 3 inputs were used in determining the approximate fair value:
|
Beginning balance as of January 1, 2016
|
|
$
|
9,317,475
|
|
|
Fair value of derivative liabilities issued
|
|
|
527,249
|
|
|
Gain on conversion of debt and change in derivative liability
|
|
|
(2,722,308
|
)
|
|
Ending balance as of March 31, 2016
|
|
$
|
7,122,416
|
|
ORIGINCLEAR, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS – (UNAUDITED)
THREE MONTHS ENDED MARCH 31, 2016
2.
|
SUMMARY OF SIGNIFICANT ACCOUNTING POLICES (Continued)
|
Loss per Share Calculations
Basic loss per share is computed
by dividing income (loss) available to common shareholders by the weighted-average number of common shares available. Diluted earnings
per share is computed similar to basic earnings per share except that the denominator is increased to include securities or other
contracts to issue common stock that would have been outstanding if the potential common shares had been issued and if the additional
common shares were dilutive. The Company’s diluted loss per share is the same as the basic loss per share for the three months
ended March 31, 2016 and 2015, as the inclusion of any potential shares would have had an anti-dilutive effect due to the Company
generating a loss.
For the period ended March 31, 2016,
the Company has excluded 74,373,123 stock options, 22,884,773 common stock purchase warrants outstanding, and $4,582,068 in convertible
notes, which are convertible into shares of common stock, because their impact on the loss per share is anti-dilutive.
Use of Estimates
The preparation of financial
statements in conformity with accounting principles generally accepted in the United States of America requires management to
make estimates and assumptions that affect the reported amounts of assets and liabilities, disclosure of contingent assets and
liabilities at the date of the financial statements, and the reported amounts of revenues and expenses during the reporting period.
Significant estimates include estimates used to review the Company’s goodwill, revenue recognition on percentage of completion
type contracts, allowances for uncollectible accounts, inventory valuation, derivative liabilities, debt beneficial conversion
features, 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.
Principles of Consolidation
The Company adopted the guidance
of ASC Topic 810 “Consolidation” of the FASB Accounting Standards Codification to determine whether and how to consolidate
another entity. Pursuant to ASC Paragraph 810-10-15-10 all majority-owned subsidiaries—all entities in which a parent
has a controlling financial interest—shall be consolidated except (1) when control does not rest with the parent, the majority
owner; (2) if the parent is a broker-dealer within the scope of Topic 940 and control is likely to be temporary; (3) consolidation
by an investment company within the scope of Topic 946 of a non-investment-company investee. Pursuant to ASC Paragraph 810-10-15-8,
the usual condition for a controlling financial interest is ownership of a majority voting interest, and, therefore, as a general
rule ownership by one reporting entity, directly or indirectly, of more than 50 percent of the outstanding voting shares of another
entity is a condition pointing toward consolidation. The power to control may also exist with a lesser percentage of ownership,
for example, by contract, lease, agreement with other stockholders, or by court decree. The Company consolidates all less-than-majority-owned
subsidiaries, if any, in which the parent’s power to control exists.
The consolidated financial
statements include all accounts of the entities at March 31, 2016.
|
|
|
|
|
Date of incorporation or
|
|
|
|
Name of consolidated
|
|
State or other jurisdiction
|
|
formation (date of acquisition
|
|
Attributable interest
|
|
subsidiary or entity
|
|
of incorporation or organization
|
|
if applicable
|
|
at March 31, 2016
|
|
|
|
|
|
|
|
|
|
Origin Clear (HK) Ltd.
|
|
Hong Kong
|
|
December 31, 2014
|
|
94.80%
|
|
Progressive Water Treatment
|
Texas
|
|
October 1, 2015
|
|
100%
|
All inter-company balances and
transactions have been eliminated.
Foreign Currency Matters
We adopted ASC Topic 830 –
Foreign Currency Matters,
which relates to translating the records of a foreign subsidiary from its functional currency
into the reporting currency. The records are in conformity with generally accepted accounting principles (GAAP). The financial
position and results of operations of the Company’s foreign subsidiary is measured using the foreign subsidiary’s local
currency as the functional currency. Revenues and expenses of such subsidiary has been translated into U.S. dollars at average
exchange rates prevailing during the period. Assets and liabilities have been translated at the rates of exchange on the balance
sheet date. The resulting translation gain and loss adjustments are recorded directly as a separate component of shareholders’
equity, unless there is a sale or complete liquidation of the underlying foreign investments. During the period ended March 31,
2016, the foreign currency translation adjustments resulted in a loss of $8.
Transaction gains and losses that
arise from exchange rate fluctuations on transactions denominated in a currency other than the functional currency are included
in the results of operations as incurred.
ORIGINCLEAR, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS – (UNAUDITED)
THREE MONTHS ENDED MARCH 31, 2016
2.
|
SUMMARY OF SIGNIFICANT ACCOUNTING POLICES (Continued)
|
Segment Reporting
Operating segments are defined as
components of an enterprise for which separate financial information is available and evaluated regularly by the chief operating
decision maker, or decision making group, in deciding the method to allocate resources and assess performance. The Company currently
has one reportable segment for financial reporting purposes, which represents the Company’s core business.
Recently Issued Accounting Pronouncements
In January 2016, FASB amended the
guidance for recognition and measurement of financial assets and liabilities. These amendments address certain aspects of recognition,
measurement, presentation, and disclosure of financial instruments. The adoption of this guidance is effective for fiscal years
beginning after December 15, 2017, including interim periods within those years. Early adoption of certain provisions of this
guidance is permitted as of the beginning of the fiscal year of adoption. Entities should apply these amendments by means of a
cumulative-effect adjustment to the balance sheet as of the beginning of the fiscal year of adoption. The amendments related to
equity securities without readily determinable fair value should be applied prospectively to equity investments that exist as
of the date of adoption. The Company does not expect this guidance to have a significant impact on the results of operations,
financial condition, or cash flows.
In March 2016, the FASB issued ASU
2016-09, “Compensation — Stock Compensation (Topic 816).” ASU 2016-09 simplifies several aspects of accounting
for share-based compensation including the tax consequences, classification of awards as equity or liabilities, forfeitures and
classification on the statement of cash flows. The ASU is effective for fiscal years beginning after December 15, 2016, including
interim periods within those fiscal years with early adoption permitted. The Company is currently evaluating the effects of adoption
this ASU. The Company does not expect this guidance to have a significant impact on the results of operations, financial condition,
or cash flows.
Management does not believe that any other recently issued, but not yet effective, accounting standards if currently
adopted would have a material effect on the accompanying unaudited condensed consolidated financial statements.
On October 1, 2015, the Company
acquired PWT from Marc Stevens through the transfer of all issued and outstanding shares of PWT in exchange (the “Exchange”)
for 10,000 shares of a new series of preferred stock, the Series B Preferred Stock, filed with the State of Nevada by the Company
on October 1, 2015.
Each share of Series B Preferred
Stock has a stated value of $150 per share and is convertible into shares of the Company’s common stock in three annual increments
beginning 12 months from closing. The conversion price is subject to adjustment in the case of reverse splits, stock dividends,
reclassifications and the like. In addition, the conversion price is subject to certain full ratchet anti-dilution protection.
The Series B Preferred Stock is entitled to vote with the holders of the Company’s common stock on all corporate actions,
including the election of the Company’s directors. The holders of the Series B Preferred Stock are entitled to cast one vote
for each share of Series B Preferred Stock owed.
The acquisition was accounted for
under ASC 805. PWT is engaged in providing water treatment systems and services for a wide variety of applications and component
sales. The acquisition is designed to enhance our services in water treatment. PWT became a wholly-owned subsidiary of the Company.
Under the purchase method of accounting, the transactions
were valued for accounting purposes at $1,500,000, which was the fair value of PWT at the time of acquisition. The assets and liabilities
of PWT were recorded at their respective fair value as of the date of acquisition. Since, the Company determined there were no
other separately identifiable intangible assets, any difference between the cost of the acquired entity and the fair value of the
assets acquired and liabilities assumed is recorded as goodwill. The acquisition date estimated fair value of the consideration
transferred consisted of the following:
|
Convertible promissory note
|
|
$
|
1,500,000
|
|
|
Total purchase price
|
|
$
|
1,500,000
|
|
|
|
|
|
|
|
|
Tangible assets acquired
|
|
$
|
1,549,700
|
|
|
Liabilities assumed
|
|
|
(537,113
|
)
|
|
|
|
$
|
1,012,587
|
|
|
Goodwill
|
|
|
487,413
|
|
|
Total purchase price
|
|
$
|
1,500,000
|
|
As of March 31, 2016, the Company has not identified any intangible assets other than goodwill. However, the above estimated
fair value of the intangible assets of PWT is based on a preliminary purchase price allocation prepared by management. As a result,
during the preliminary purchase price allocation period, which may be up to one year from the business combination date, we may
record adjustments to the assets acquired and liabilities assumed, with the corresponding offset to goodwill. After the preliminary
purchase price allocation period, we record adjustments to assets acquired or liabilities assumed subsequent to the purchase price
allocation period in our operating results in the period in which the adjustments were determined.
ORIGINCLEAR, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS – (UNAUDITED)
THREE MONTHS ENDED MARCH 31, 2016
3.
|
BUSINESS ACQUISITION (Continued)
|
Proforma results
The following tables set forth the unaudited pro forma results of the Company as if the acquisition of PWT had taken place on the
first day of the periods presented. These combined results are not necessarily indicative of the results that may have been achieved
had the companies been combined as of the first day of the periods presented.
|
|
|
|
|
|
Period Ended
|
|
|
|
|
|
|
|
March 31, 2015
|
|
|
|
|
|
|
|
(unaudited)
|
|
|
Total Revenues
|
|
|
|
|
|
$
|
868,227
|
|
|
Net Income (Loss)
|
|
|
|
|
|
$
|
(820,835
|
)
|
|
Basic and Diluted Net Earnings Per Common Share
|
|
|
|
|
|
$
|
(0.01
|
)
|
Preferred Stock
As of March 31, 2016, the Company’s
preferred stock consisted of Series A and Series B shares. There were 25,000,000 preferred shares authorized and 11,000 shares
outstanding. The shares have a par value of $0.0001 per share. The Series A preferred stock provides for supermajority voting rights
to the holder, and the Series B stock is convertible into shares of common stock to the holder.
Common Stock
During the three months ended March
31, 2016, the Company issued 38,505,536 shares of common stock for the settlement of convertible promissory notes in an aggregate
principal in the amount of $314,000, plus interest in the amount of $37,114, based upon conversion prices per share ranging from
$0.0085 to $0.0098.
During the three months ended March
31, 2016, the Company issued 13,237,739 shares of common stock for services at fair value of $293,980.
During the three months ended March
31, 2016, the Company issued 4,573,170 shares of common stock for the settlement of a convertible promissory note in an aggregate
principal in the amount of $75,000, based upon a conversion price of $0.0164 per share.
ORIGINCLEAR, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS – (UNAUDITED)
THREE MONTHS ENDED MARCH 31, 2016
5.
|
CONVERTIBLE PROMISSORY NOTES
|
On various dates the Company entered
into unsecured convertible Notes (the “Convertible Promissory Notes” or “Notes”), that mature between
six and nine months from the date of issuance and bear interest at 10% per annum. The Notes mature on various dates through December
31, 2016. The Notes may be converted into shares of the Company’s common stock at conversion prices ranging from the lesser
of $0.06 to $0.14 (subject to adjustment for stock splits, dividends, combinations and other similar transactions) or 50% of the
lowest trade price on any trade day following issuance of the Notes. The Notes include customary default provisions
related to payment of principal and interest and bankruptcy or creditor assignment. In the event of default, the Notes
shall become immediately due and payable at the mandatory default amount. The mandatory default amount is 150% of the Note amount
and such mandatory default amount shall bear interest at 10% per annum. In addition, for as long as the Notes or other
convertible notes in effect between the purchaser and the Company are outstanding, if the Company issues any security with terms
more favorable than the terms of the Notes or such other convertible notes or a term was not similarly provided to the purchaser
of the Notes or such other convertible notes, then such more favorable or additional term shall, at the purchaser’s option,
become part of the Notes and such other convertible notes. The conversion feature of the Notes was considered a derivative in
accordance with current accounting guidelines because of the reset conversion features of the Notes. As of December 31, 2015,
the outstanding principal balance was $2,535,000. During the three months ended March 31, 2016, the Company issued 28,034,948
shares of common stock upon conversion of $225,000 in aggregate principal, plus accrued interest of $37,114. As of March 31, 2016,
the Notes had an aggregate remaining balance of $2,205,000. The Company recorded amortization of debt discount, which was recognized
as interest expense in the amount of $1,691 during the three months ended March 31, 2016.
On February 24, 2015, the
OID Notes with an aggregate remaining principle balance of $273,124, plus accrued interest of $13,334 were amended. The Notes
are unsecured convertible promissory notes (the “OID Notes”), that included an original issue discount and one time
interest, which has been fully amortized. The OID Notes were extended and matured on various dates through September 19, 2014.
On each maturity date, each note was extended one year from its maturity date through September 19, 2015. On February 24, 2015,
the Notes were amended and have a maturity date of December 31, 2015. The maturity date was subsequently extended to December
31, 2016. The Notes were analyzed under ASC 470
(Extinguishment & Modification of debt)
to determine if there was a
10% change between the fair value of the embedded conversion option immediately before and after the modification or exchange.
The change of the fair value of the conversion feature was greater than 10% of the carrying value of the debt. As a result, in
accordance with ASC 470-50, the Company deemed the terms of the amendment to be substantially different and treated the convertible
note as an extinguishment. The OID Notes were convertible into shares of the Company’s common stock at a conversion price
initially of $0.4375. After the amendment the conversion price changed to the lesser of $0.08 per share, or b) fifty percent (50%)
of the lowest trade price of common stock recorded since the original effective date of this note, or c) the lowest effective
price per share granted to any person or entity after the effective date. On May 19, 2015, a holder of a note with a more favorable
term converted a note at a price of $0.02, which became part of this note due to the reset provision mentioned above. The conversion
feature of the notes was considered a derivative in accordance with current accounting guidelines because of the reset conversion
features of the notes. On March 31, 2016, the Company issued 10,470,588 shares of common stock upon partial conversion of principal
in the amount of $89,000, leaving a remaining balance of $184,124.
The Company entered into various
unsecured convertible Notes (the “Convertible Promissory Notes” or “Notes”), for an aggregate amount of
$1,900,000. As of March 31, 2016, the Company has received advances in the aggregate of $1,300,000. The notes matured between
nine and twelve months from the date of issuance of each advance and bears interest at 10% per annum. The Notes were extended
and mature on various dates ending on May 31, 2017. The Notes may be converted into shares of the Company’s common stock
at conversion prices ranging from the lesser of $0.02 to $0.08 (subject to adjustment for stock splits, dividends, combinations
and other similar transactions) or 50% of the lowest trade price on any trade day following issuance of the Notes. The
Notes include customary default provisions related to payment of principal and interest and bankruptcy or creditor assignment. In
the event of default, the Notes shall become immediately due and payable at the mandatory default amount. The mandatory default
amount is 150% of the Note amount and such mandatory default amount shall bear interest at 10% per annum. In addition,
for as long as the Notes or other convertible notes in effect between the purchaser and the Company are outstanding, if the Company
issues any security with terms more favorable than the terms of the Notes or such other convertible notes or a term was not similarly
provided to the purchaser of the Notes or such other convertible notes, then such more favorable or additional term shall, at
the purchaser’s option, become part of the Notes and such other convertible notes. The conversion feature of the Notes was
considered a derivative in accordance with current accounting guidelines because of the reset conversion features of the Notes.
The Company recorded amortization of debt discount, which was recognized as interest expense in the amount of $56,613 during the
three months ended March 31, 2016.
On June 30, 2015, the
Company issued a convertible note in exchange for an accounts payable in the amount of $432,048, which could be converted
into shares of the Company’s common stock after December 31, 2015. The note was accounted for under ASC 470, whereby, a
beneficial conversion feature was recorded at time of issuance. The note did not meet the criteria of a derivative, and was
accounted for as a beneficial conversion feature, which was amortized over the life of the note and recognized as interest
expense in the financial statements. On January 1, 2016, the note meet the criteria of a derivative and was accounted for
under ASC 815. The note has a zero stated interest rate, and the conversion price shall be equal to 75% of the average three
lowest last sale prices traded during the 25 trading days immediately prior to conversion. On February 12, 2016, the Company
issued 4,573,171 shares of commons stock upon conversion of $75,000 in principal, leaving a remaining balance of $357,048.
The Company recorded amortization of debt discount, which was recognized as interest expense in the amount of $53,266 during
the three months ended March 31, 2016.
On March 31, 2016, the Company
issued a convertible note in exchange for an accounts payable in the amount of $430,896, which could be converted into shares
of the Company’s common stock after September 15, 2016. The note was accounted for under ASC 470, whereby, a beneficial
conversion feature was recorded at time of issuance. The note has a zero stated interest rate, and the conversion price shall
be equal to 75% of the average three lowest last sale prices traded during the 25 trading days immediately prior to conversion.
The note did not meet the criteria of a derivative, and was accounted for as a beneficial conversion feature, which will be amortized
over the life of the note and recognized as interest expense in the financial statements. The Company recorded amortization of
debt discount, which was recognized as interest expense in the amount of $9,245 during the three months ended March 31, 2016.
ORIGINCLEAR, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS – (UNAUDITED)
THREE MONTHS ENDED MARCH 31, 2016
6.
|
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 derivative liability is adjusted periodically according
to the stock price fluctuations.
For purpose of determining the
fair market value of the derivative liability for the embedded conversion, the Company used Black Scholes option valuation
model. The significant assumptions used in the Black Scholes valuation of the derivative are as follows:
|
Risk free interest rate
|
|
|
0.14% - 1.02%
|
|
|
Stock volatility factor
|
|
|
4.72% - 189.09%
|
|
|
Weighted average expected option life
|
|
|
6 months - 2 years
|
|
|
Expected dividend yield
|
|
|
None
|
|
The derivative liability recognized in the
financial statements as of March 31, 2016 was $7,122,416.
Option
s
The Board of Directors adopted
the OriginClear, Inc. (formerly OriginOil, Inc.), 2009 Incentive Stock Option Plan (the “2009 Plan”) for the purposes
of granting stock options to its employees and others providing services to the Company, which reserves and sets aside for the
granting of options for Five Hundred Thousand (500,000) shares of Common Stock.
On May 25, 2012, the Board of
Directors adopted a new OriginOil, Inc., 2012 Incentive Stock Option Plan (the “2012 Plan”) for the purposes of granting
stock options to its employees and others providing services to the Company, which reserves and sets aside for the granting of
options for One Million (1,000,000) shares of Common Stock. Options granted under these Plans may be either incentive
options or nonqualified options and shall be administered by the Company's Board. Each Option shall be exercisable to
the nearest whole share, in installments or otherwise, as the respective option agreements may provide. Notwithstanding any other
provision of the Plan or of any option agreement, each Option shall expire on the date specified in the option agreement, which
date shall not be later than the tenth (10th) anniversary from the effective date of grant.
On June 14, 2013, the Board of
Directors adopted a new OriginOil, Inc., 2013 Incentive Stock Option Plan (the “2013 Plan”) for the purposes of granting
stock options to its employees and others providing services to the Company, which reserves and sets aside for the granting of
options for Four Million (4,000,000) shares of Common Stock. Options granted under the Plan may be either incentive
options or nonqualified options and shall be administered by the Company's Board. Each Option shall state the number
of shares to which it pertains. The exercise price will be determined by the holders percentage owned as follows: If the holder
owns more than 10% of the total combined voting power or value of all classes of stock of the Company, then the exercise price
will be no less than 110% of the fair market value of the stock as of the date of grant; if the person is not a 10% holder, then
the exercise price will be no less than 100% of the fair market value of the stock as of the date of grant. Notwithstanding any
other provision of the 2013 Plan or of any option agreement, each Option shall expire on the date specified in the option agreement,
which date shall not be later than the tenth (10th) anniversary from the date of grant. If the status of an employee terminates
for any reason other than disability or death, then the Optionee or their representative shall have the right to exercise the portion
of any Options which were exercisable as of the date of such termination, in whole or in part, not less than 30 days nor more than
three (3) months after such termination.
On October 2, 2015, the Board of
Directors adopted a new OriginClear, Inc., 2015 Equity Incentive Stock Option Plan (the “2015 Plan”) for the purposes
of granting stock options to its employees and others providing services to the Company, which reserves and sets aside for the
granting of options for One Hundred Sixty Million (160,000,000) shares of Common Stock. Options granted under these
Plans may be either incentive options or nonqualified options and shall be administered by the Company's Board. Each
Option shall be exercisable to the nearest whole share, in installments or otherwise, as the respective option agreements may
provide. Notwithstanding any other provision of the Plan or of any option agreement, each Option shall expire on the date specified
in the option agreement, which date shall not be later than the fifth (5th) anniversary from the effective date of grant.
Options granted under these Plans
may be either incentive options or nonqualified options and shall be administered by the Company's Board. Each Option
shall be exercisable to the nearest whole share, in installments or otherwise, as the respective option agreements may provide.
Notwithstanding any other provision of the Plan or of any option agreement, each Option shall expire on the date specified in
the option agreement, which date shall not be later than the tenth (5th) anniversary from the effective date of grant. If the
status of an employee terminates for any reason other than disability or death, then the Optionee or their representative shall
have the right to exercise the portion of any Options which were exercisable as of the date of such termination, in whole or in
part, not less than thirty (30) days nor more than three (3) months after such termination.
With respect to Non-statutory Options
granted to employees, directors or consultants, the Board or Committee may specify such period for exercise that the Option shall
automatically terminate following the termination of employment or services as to shares covered by the Option as the Board or
Committee deems reasonable and appropriate.
ORIGINCLEAR, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS – (UNAUDITED)
THREE MONTHS ENDED MARCH 31, 2016
7.
|
OPTIONS AND WARRANTS (Continued)
|
During the three months ended March
31, 2016, the Company granted 1,000,000 incentive stock options, and recognized compensation costs of $52,296 based on the fair
value of the options vested for the three months ended March 31, 2016.
A summary of the Company’s stock option
activity and related information follows:
|
|
|
March 31, 2016
|
|
|
|
|
|
|
|
Weighted
|
|
|
|
|
Number
|
|
|
average
|
|
|
|
|
of
|
|
|
exercise
|
|
|
|
|
Options
|
|
|
price
|
|
|
Outstanding, beginning of period
|
|
|
119,404,644
|
|
|
$
|
0.43
|
|
|
Granted
|
|
|
1,000,000
|
|
|
$
|
0.02
|
|
|
Exercised
|
|
|
-
|
|
|
|
-
|
|
|
Forfeited/Expired
|
|
|
(1,200,000
|
)
|
|
$
|
0.04
|
|
|
Outstanding, end of period
|
|
|
119,204,644
|
|
|
$
|
0.05
|
|
|
Exercisable at the end of period
|
|
|
74,373,123
|
|
|
$
|
0.05
|
|
|
Weighted average fair value of options granted during the period
|
|
|
|
|
|
$
|
-
|
|
The weighted average remaining contractual life of options
outstanding issued under the 2009 Plan, 2012 Plan, and 2013 Plan as of March 31, 2016, was as follows:
|
|
|
|
|
|
|
|
|
|
Weighted
|
|
|
|
|
|
|
|
|
|
|
|
Average
|
|
|
|
|
|
Stock
|
|
|
Stock
|
|
|
Remaining
|
|
|
Exercisable
|
|
|
Options
|
|
|
Options
|
|
|
Contractual
|
|
|
Prices
|
|
|
Outstanding
|
|
|
Exercisable
|
|
|
Life (years)
|
|
|
$
|
0.19 - 4.20
|
|
|
|
1,971,978
|
|
|
|
1,463,124
|
|
|
|
0.29 - 8.52
|
|
|
$
|
0.41 - 0.44
|
|
|
|
1,382,666
|
|
|
|
854,791
|
|
|
|
7.46
|
|
|
$
|
0.02 - 0.0375
|
|
|
|
115,850,000
|
|
|
|
72,059,375
|
|
|
|
4.52 - 5.00
|
|
|
|
|
|
|
|
119,204,644
|
|
|
|
74,377,290
|
|
|
|
|
|
As
of March 31, 2016, there was no intrinsic value with regards to the outstanding options.
Warrants
During the three months
ended March 31, 2016, the Company did not grant any warrants.
A summary of the Company’s warrant activity
and related information follows:
|
|
|
|
March 31, 2016
|
|
|
|
|
|
|
|
|
Weighted
|
|
|
|
|
|
|
|
|
average
|
|
|
|
|
|
|
|
|
exercise
|
|
|
|
|
|
Options
|
|
|
price
|
|
|
|
Outstanding - January 1, 2015
|
|
|
|
23,297,108
|
|
|
$
|
0.21
|
|
|
|
Granted
|
|
|
|
-
|
|
|
|
-
|
|
|
|
Exercised
|
|
|
|
-
|
|
|
|
-
|
|
|
|
Forfeited
|
|
|
|
(412,335
|
)
|
|
$
|
0.43
|
|
|
|
Outstanding - September 30, 2015
|
|
|
|
22,884,773
|
|
|
$
|
0.20
|
|
At
March 31, 2016, the weighted average remaining contractual life of warrants outstanding:
|
|
|
|
|
|
|
|
|
|
Weighted
|
|
|
|
|
|
|
|
|
|
|
Average
|
|
|
|
|
|
|
|
|
|
|
Remaining
|
|
Exercisable
|
|
|
Warrants
|
|
|
Warrants
|
|
|
Contractual
|
|
Prices
|
|
|
Outstanding
|
|
|
Exercisable
|
|
|
Life (years)
|
|
$
|
0.15 - 0.65
|
|
|
|
21,763,079
|
|
|
|
21,763,079
|
|
|
0.02- 2.20
|
|
$
|
0.25 - 1.75
|
|
|
|
841,692
|
|
|
|
841,692
|
|
|
1.07 - 2.47
|
|
$
|
0.90 - 6.90
|
|
|
|
280,002
|
|
|
|
280,002
|
|
|
0.08 - 6.63
|
|
|
|
|
|
|
22,884,773
|
|
|
|
22,884,773
|
|
|
|
ORIGINCLEAR, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS – (UNAUDITED)
THREE MONTHS ENDED MARCH 31, 2016
Management evaluated subsequent
events as of the date of the financial statements pursuant to ASC TOPIC 855, and reported the following events:
Between April 18, 2016 and
April 26, 2016 the Company sold, in a private placement, 17,500,000 shares of its common stock to accredited investors for an aggregate
consideration of $175,000.
Between April 26, 2016, and
May 12, 2016, the Company issued to consultants an aggregate of 15,572,573 shares of the Company’s common stock for services
at a fair value of $316,873.
On April 28, 2016, holders
of convertible promissory notes converted an aggregate principal and interest amount of $71,211 into an aggregate of 8,377,760
shares of the Company’s common stock.
On May 11, 2016, the Board
of Directors of the Company voted to amend a prior agreement dated February 16, 2010 with T. Riggs Eckelberry, the Company’s
chief executive officer. The original agreement entitled Mr. Eckelberry to a bonus of up a $40,000 per quarter (up to $160,000
annually) based on meeting certain objectives (the “Original Bonus Process”). That agreement allowed Mr. Eckelberry
to receive a bonus based on partial obtainment of those objectives as well. On May 16, 2016, the Company and T. Riggs Eckelberry,
entered into an agreement pursuant to which the Original Bonus Process was cancelled retroactively to January 1, 2016, cancelling
any bonus award for the first Quarter 2016 and pursuant to which Mr. Eckelberry will receive a quarterly bonus of $40,000 (up to
$160,000 annually) only if the Company achieved consolidated operating profit for the previous quarter.
On May 12, 2016, the Company
entered into Restricted Stock Award Agreements with T. Riggs Eckelberry (“Eckelberry”), a consultant (“Consultant”)
and employee of the Company (“Employee”), pursuant to which the Company granted 60,000,000 shares of common stock,
par value $0.0001 per share to Eckelberry, 30,000,000 shares of common stock, par value $0.0001 per share to Consultant and 20,000,000
shares of common stock, par value $0.0001 per share to Employee.
On May 12, 2016, the Board
approved the issuance of $60,000 in shares of the Company’s common stock to consultants for services in lieu of cash consideration.