UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

Form 10-Q

 

(Mark One)

 

  ☒     QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

 

FOR THE QUARTERLY PERIOD ENDED:  June 30, 2015

 

☐    TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

 

For the transition period from __________ to __________

 

Commission File Number: ________________

 

ORIGINCLEAR, INC.

 (Exact name of registrant as specified in its charter)

 

Nevada		26-0287664
(State or other jurisdiction of incorporation or organization)		(I.R.S. Employer Identification No.)

 

5645 West Adams Blvd

Los Angeles, CA 90016

 (Address of principal executive offices, Zip Code)

 

(323) 939-6645

(Registrant’s telephone number, including area code)

 

Indicate by check mark whether the registrant (1) filed all reports required to be filed by Section 13 or 15(d) of the Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes ☒    No ☐

 

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes ☒   No  ☐

 

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.

 

Large accelerated filer	☐	Accelerated filer	☐
Non-accelerated filer	☐	Smaller reporting company	☒

 

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ☐   No ☒

 

The number of shares of registrant’s common stock outstanding, as of August 4, 2015 was 155,520,165.

 

 

 

TABLE OF CONTENTS

 

			Page
PART I - FINANCIAL INFORMATION
Item 1.	Financial Statements.		3
Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations.		14
Item 3.	Quantitative and Qualitative Disclosures About Market Risk.		18
Item 4.	Controls and Procedures.		18
Item 1.	Legal Proceedings.		19
Item 1A.	Risk Factors.		19
Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds.		19
Item 3.	Defaults Upon Senior Securities.		19
Item 4.	Mine Safety Disclosures.		19
Item 5.	Other Information.		19
Item 6.	Exhibits.		20
SIGNATURES			20

 

 

PART I - FINANCIAL INFORMATION ORIGINCLEAR, INC.

 

ORIGINCLEAR, INC.

(formerly ORIGINOIL, INC.)

CONDENSED BALANCE SHEETS

 

		June 30, 2015				December 31, 2014
		(Unaudited)
ASSETS
CURRENT ASSETS
Cash		$	180,699			$	198,384
Work in progress			124,609				87,123
Prepaid expenses			83,747				46,482
TOTAL CURRENT ASSETS			389,055				331,989
NET PROPERTY AND EQUIPMENT			78,746				78,888
OTHER ASSETS
Other asset			37,038				37,038
Trademark			4,467				4,467
Security deposit			9,650				10,247
TOTAL OTHER ASSETS			51,155				51,752
TOTAL ASSETS		$	518,956			$	462,629
LIABILITIES AND SHAREHOLDERS' DEFICIT
Current Liabilities
Accounts payable		$	22,833			$	203,082
Accrued expenses			347,122				272,291
Deferred income			41,266				47,570
Derivative liabilities			4,611,398				4,052,401
Convertible promissory notes, net of discount of $599,857 and $454,054, respectively			3,878,846				3,087,602
Total Current Liabilities			8,901,465				7,662,946
SHAREHOLDERS' DEFICIT
Preferred stock, $0.0001 par value, 25,000,000 shares authorized 1,000 shares issued and outstanding, respectively			-				-
Common stock, $0.0001 par value, 1,000,000,000 shares authorized 147,198,804 and 99,748,172 shares issued and outstanding, respectively			14,719				9,975
Preferred treasury stock, 1,000  and 0 shares outstanding, respectively			-				-
Additional paid in capital			42,540,326				40,258,419
Accumulated deficit			(50,937,554	)			(47,468,711	)
TOTAL SHAREHOLDERS' DEFICIT			(8,382,509	)			(7,200,317	)
TOTAL LIABILITIES AND SHAREHOLDERS' DEFICIT		$	518,956			$	462,629

 

The accompanying notes are an integral part of these condensed financial statements

 

ORIGINCLEAR, INC.

(formerly ORIGINOIL, INC.)

CONDENSED STATEMENTS OF OPERATIONS

(Unaudited)

 

		Three Months Ended								Six Months Ended
		June 30, 2015				June 30, 2014				June 30, 2015				June 30, 2014
Sales		$	88,710			$	-			$	136,280			$	159,410
Cost of Goods Sold			58,130				-				86,294				105,970
Gross Profit			30,580				-				49,986				53,440
Operating Expenses
Selling and general and administrative expenses			1,325,401				2,435,225				2,296,539				3,701,076
Research and development			201,386				232,590				460,742				479,437
Depreciation and amortization expense			4,700				4,115				9,171				7,971
Total Operating Expenses			1,531,487				2,671,930				2,766,452				4,188,484
Loss from Operations			(1,500,907	)			(2,671,930	)			(2,716,466	)			(4,135,044	)
OTHER (EXPENSE) INCOME
Realized gain on investment			-				-				-				6,353
Loss on sale of asset			(1,552	)			-				(1,552	)			-
Fair value of financing cost			(143,172	)			-				(143,172	)
Fair value of discounted warrants			149,807				-				-				-
Gain (Loss) on change in derivative liability			133,783				(1,817,609	)			308,740				(3,951,326	)
Commitment fee			-				(38,540	)			(51,697	)			(38,540	)
Interest expense			(417,739	)			(623,788	)			(864,696	)			(1,265,554	)
TOTAL OTHER (EXPENSE) INCOME			(278,873	)			(2,479,937	)			(752,377	)			(5,249,067	)
NET LOSS		$	(1,779,780	)		$	(5,151,867	)		$	(3,468,843	)		$	(9,384,111	)
BASIC AND DILUTED LOSS PER SHARE		$	(0.01	)		$	(0.07	)		$	(0.03	)		$	(0.14	)
WEIGHTED-AVERAGE COMMON SHARES OUTSTANDING, BASIC AND DILUTED			132,818,686				77,341,561				119,701,452				68,231,895

 

The accompanying notes are an integral part of these condensed financial statements

 

 

ORIGINCLEAR, INC.

(formerly ORIGINOIL, INC.)

CONDENSED STATEMENT OF SHAREHOLDERS' DEFICIT

FOR THE SIX MONTHS ENDED JUNE 30, 2015

 

			Preferred stock								Common stock								Additional Paid-in				Accumulated
			Shares				Amount				Shares				Amount				Capital				Deficit				Total
Balance at December 31, 2014			-			$	-				99,748,172			$	9,975			$	40,258,419			$	(47,468,711	)		$	(7,200,317	)
Common stock issued for exercise of warrants for cash			-				-				4,923,624				491				245,689				-				246,180
Common stock issued for cash			-				-				1,916,667				192				57,308				-				57,500
Common stock issuance for conversion of debt			-				-				28,884,487				2,888				977,127				-				980,015
Common stock issuance of supplemental shares			-				-				574,796				58				51,639				-				51,697
Common stock issued at fair value for services			-				-				11,151,058				1,115				737,975				-				739,090
Stock compensation cost			-				-				-				-				89,747				-				89,747
Beneficial conversion feature			-				-				-				-				122,422				-				122,422
Net loss for the six months ended June 30, 2015			-				-				-				-				-				(3,468,843	)			(3,468,843	)
Balance at June 30, 2015 (Unaudited)			-			$	-				147,198,804			$	14,719			$	42,540,326			$	(50,937,554	)		$	(8,382,509	)

 

 

The accompany notes are an integral part of these condensed financial statements

 

 

ORIGINCLEAR, INC.

(formerly ORIGINOIL, INC.)

CONDENSED STATEMENTS OF CASH FLOWS

(Unaudited)

 

		Six Months Ended
		June 30, 2015				June 30, 2014
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss		$	(3,468,843	)		$	(9,384,111	)
Adjustment to reconcile net loss to net cash used in operating activities
Depreciation & amortization			9,171				7,971
Gain on sale of investment			-				(6,353	)
Loss on sale of asset			1,552				-
Common stock and warrants issued for services			739,090				1,646,390
Stock and warrant compensation expense			89,747				103,678
Fair value of debt financing cost			143,172				-
Change in valuation of derivative liability			(308,740	)			3,951,326
Debt discount and original issue discount  recognized as interest expense			701,181				1,174,432
Equity based commitment fee expense			51,697				38,540
Changes in Assets and Liabilities
(Increase) Decrease in:
Prepaid expenses			(37,265	)			10,687
Work in progress			(37,486	)			(52,253	)
Other asset			597				1,903
Increase (Decrease) in:
Accounts payable			252,300				161,688
Accrued expenses			144,848				(33,355	)
Deferred income			(6,304	)			(50,000	)
NET CASH USED IN OPERATING ACTIVITIES			(1,725,283	)			(2,429,457	)
CASH FLOWS USED FROM INVESTING ACTIVITIES:
Proceeds from sale of investment, at cost			-				6,815
Purchase of fixed assets			(11,082	)			(11,212	)
CASH USED IN INVESTING ACTIVITIES			(11,082	)			(4,397	)
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from convertible promissory notes			1,415,000				1,515,000
Proceeds for issuance of common stock			303,680				750,000
NET CASH PROVIDED BY FINANCING ACTIVITIES			1,718,680				2,265,000
NET DECREASE IN CASH			(17,685	)			(168,854	)
CASH BEGINNING OF PERIOD			198,384				821,448
CASH END OF PERIOD		$	180,699			$	652,594
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION
Interest paid		$	452			$	1,282
Taxes paid		$	-			$	-
SUPPLEMENTAL DISCLOSURES OF NON CASH TRANSACTIONS
Common stock issued for supplemental shares		$	51,697			$	144,293
Common stock issued for conversion of debt		$	980,015			$	1,220,139

  

The accompanying notes are an integral part of these condensed financial statements

 

  

ORIGINCLEAR, INC.

(formerly ORIGINOIL, INC.)

NOTES TO CONDENSED FINANCIAL STATEMENTS – (UNAUDITED)

SIX MONTHS ENDED JUNE 30, 2015

 

1.	Basis of Presentation

 

The accompanying unaudited condensed financial statements of OriginClear, Inc. (the “Company”) (formerly OriginOil, Inc.) have been prepared in accordance with accounting principles generally accepted in the United States of America for interim financial information and with the instructions to Form 10-Q and Rule 10-01 of Regulation S-X.  Accordingly, they do not include all of the information and footnotes required by generally accepted accounting principles for complete financial statements. In the opinion of management, all normal recurring adjustments considered necessary for a fair presentation have been included.  Operating results for the six months ended June 30, 2015 are not necessarily indicative of the results that may be expected for the year ending December 31, 2015.  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, 2014.

 

Going Concern

The accompanying condensed 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 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.

 

Revenue Recognition

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 it is received, 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 either a purchase agreement or rental agreement signed by the customer with a payment arrangement.  

 

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 six months ended June 30, 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 June 30, 2015, the Company has excluded 3,954,644 options, 24,263,426 warrants outstanding, and notes convertible into 213,616,541 shares of common stock, because their impact on the loss per share is anti-dilutive.

 

Stock-Based Compensation

The Company periodically issues stock options and warrants to employees and non-employees in non-capital raising transactions for services and for financing costs. The Company accounts for stock option and warrant grants issued and vesting to employees based on the authoritative guidance provided by the Financial Accounting Standards Board whereas the value of the award is measured on the date of grant and recognized over the vesting period. The Company accounts for stock option and warrant grants issued and vesting to non-employees in accordance with the authoritative guidance of the Financial Accounting Standards Board whereas the value of the stock compensation is based upon the measurement date as determined at either a) the date at which a performance commitment is reached, or b) at the date at which the necessary performance to earn the equity instruments is complete. Non-employee stock-based compensation charges generally are amortized over the vesting period on a straight-line basis. In certain circumstances where there are no future performance requirements by the non-employee, option grants are immediately vested and the total stock-based compensation charge is recorded in the period of the measurement date.

 

 

ORIGINCLEAR, INC.

(formerly ORIGINOIL, INC.)

NOTES TO CONDENSED FINANCIAL STATEMENTS – (UNAUDITED)

SIX MONTHS ENDED JUNE 30, 2015

 

2.	SUMMARY OF SIGNIFICANT ACCOUNTING POLICES (Continued)

 

Fair Value of Financial Instruments

Fair Value of Financial Instruments, requires disclosure of the fair value information, whether or not recognized in the balance sheet, where it is practicable to estimate that value. As of June 30, 2015, 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 June 30, 2015:

 

			Total				(Level 1)				(Level 2)				(Level 3)
	Derivative Liability		$	4,611,398			$	-			$	-			$	4,611,398
	Total liabilities measured at fair value		$	4,611,398			$	-			$	-			$	4,611,398

 

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, 2015		$	4,052,401
	Fair value of derivative liabilities issued			867,737
	Loss on change in derivative liability			(308,740	)
	Ending balance as of June 30, 2015		$	4,611,398

 

Use of Estimates

The preparation of the condensed financial statements in conformity with accounting principles generally accepted in the U.S requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities, disclosure of contingent assets and liabilities at the financial statement date, and reported amounts of revenue and expenses during the reporting period. Significant estimates are used in valuing our stock options, warrants, convertible notes, derivative liabilities, and common stock issued for services, among other items. Actual results could differ from these estimates.

 

Recently Issued Accounting Pronouncements

Management has reviewed recently issued accounting pronouncements and has adopted the following;

 

On August 27, 2014, the Company adopted the amendment to ASU 2014-15 on Presentation of Financial Statements Going Concern (Subtopic 205-40). The amendment provides for guidance to reduce diversity in the timing and content of footnote disclosures. The amendment requires management to assess the Company’s ability to continue as a going concern by incorporating and expanding upon certain principles that are currently in U.S. auditing standards. The Company has to define the term of substantial doubt, which has to be evaluated every reporting period including interim periods. Management has to provide principles for considering the mitigating effect of its plan, and disclose when substantial doubt is alleviated as well as when it is not alleviated. The Company is required to assess managements plan for a period of one year after the financial statements are issued (or available to be issued). The amendment is effective for annual periods ending after December 15, 2016. Early adoption is permitted. The Company does not believe the accounting standards currently adopted will have a material effect on the accompanying condensed financial statements.

 

 

ORIGINCLEAR, INC.

(formerly ORIGINOIL, INC.)

NOTES TO CONDENSED FINANCIAL STATEMENTS – (UNAUDITED)

SIX MONTHS ENDED JUNE 30, 2015

 

3.	CAPITAL STOCK

 

Preferred Stock

On April 8, 2015, the Board of Directors of OriginClear, Inc. (the “Company”) authorized the issuance of 1,000 shares of Series A Preferred Stock to the Company’s Chief Executive Officer and Director, T. Riggs Eckelberry, and the Company filed a Certificate of Designation for is Series A Preferred Stock with the Secretary of State of Nevada designating 1,000 shares of its authorized preferred stock as Series A Preferred.

 

The shares of Series A Preferred Stock have a par value of $0.0001 per share. The Series A Preferred Shares do not have a dividend rate or liquidation preference and are not convertible into shares of common stock. The preferred stock gave the CEO voting rights of 51%, which remained issued and outstanding until July 8, 2015 at which time, the shares were automatically rescinded by the Company.

 

Common Stock

During the six months ended June 30, 2015, the Company issued 4,923,624 shares of common stock for exercise of the purchase warrants in the amount of 4,923,624 for prices ranging from $0.02 to $0.05 per share for cash in the amount of $246,180.

 

During the six months ended June 30, 2015, the Company issued 1,916,667 shares of commons stock at $0.03 per share for cash in the amount of $57,500. The shares were issued through a private offering pursuant to Section 4(a)(2) of the Securities Act of 1933, as amended, Regulation D and Regulation S promulgated under the Securities Act.

 

During the six months ended June 30, 2015, the Company issued 28,884,487 shares of common stock for the settlement of convertible promissory notes in an aggregate principal in the amount of $910,000, plus interest in the amount of $70,015, based upon conversion prices ranging from $0.02 to $0.052.

 

During the six months ended June 30, 2015, the Company issued 11,151,058 shares of common stock for services at fair value of $739,090.

 

During the six months ended June 30, 2015, the Company issued 574,796 shares of common stock for supplemental shares based on an agreement entered into with the subscribers of the original subscription agreement. Under the terms of the supplemental agreement, if at any time within eighteen (18) months following the issuance of shares to the subscriber (the “Adjustment Period”) the market price (as defined below) of the Company's common stock is less than the price per share,  then the price per  share shall be reduced one time to the market price (the "Adjusted Price") such that the Company shall promptly issue additional shares of the Company's common stock to the Subscriber for no additional  consideration, in an amount sufficient that the aggregate purchase price, when divided by the total number of shares purchased thereunder plus those shares of common stock issued as a result of the dilutive Issuance will equal the adjusted price.  For the purposes hereof: the ''Market Price" shall mean the average closing price of the Company's common stock for any ten (10)  consecutive trading days during the Adjustment Period.

 

4.	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 January 25, 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, 2014, the outstanding principal balance was $2,885,000. During the six months ended June 30, 2015, the Company issued an additional $615,000 of these Notes, and converted $680,000 in aggregate principal, plus accrued interest of $70,015 into 24,429,065 shares of common stock. As of June 30, 2015, the Notes had an aggregate remaining balance of $2,820,000. The Company recorded amortization of debt discount, which was recognized as interest expense in the amount of $384,895 during the six months ended June 30, 2015.

  

On February 24, 2015, the OID Notes with an aggregate remaining balance of $273,125 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 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. The Company recorded amortization of debt discount, which was recognized as interest expense in the amount of $87,786 during the six months ended June 30, 2015.

 

 

ORIGINCLEAR, INC.

(formerly ORIGINOIL, INC.)

NOTES TO CONDENSED FINANCIAL STATEMENTS – (UNAUDITED)

SIX MONTHS ENDED JUNE 30, 2015

 

4.	CONVERTIBLE NOTES PAYABLE (Continued)

 

During the six months ended June 30, 2015, the Company entered into various unsecured convertible Notes (the “Convertible Promissory Notes” or “Notes”), for an aggregate amount of $800,000. The notes mature nine months from the date of issuance and bear interest at 10% per annum. The Notes mature on various dates ending on February 25, 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 $0.08 (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 $83,487 during the six months ended June 30, 2015.

 

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 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 $123 during the six months ended June 30, 2015.

 

 On September 29, 2014, the Company issued a convertible note in exchange for an accounts payable in the amount of $383,351, which could be converted into shares of the Company’s common stock after March 29, 2015. 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 $144,892 during the six months ended June 30, 2015.

 

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.

 

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 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			.01% - .28	%
	Stock volatility factor			55.59% - 124.86	%
	Weighted average expected option life			6 - 9 months
	Expected dividend yield			None

  

The derivative liability recognized in the financial statements as of June 30, 2015 was $4,611,398.

 

 

ORIGINCLEAR, INC.

(formerly ORIGINOIL, INC.)

NOTES TO CONDENSED FINANCIAL STATEMENTS – (UNAUDITED)

SIX MONTHS ENDED JUNE 30, 2015

 

6.	OPTIONS AND WARRANTS

 

Options

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 OriginClear, Inc. (formerly 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.  

 

On June 14, 2013, the Board of Directors adopted a new OriginClear, Inc. (formerly 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 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. 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.

 

During the six months ended June 30, 2015, the Company did not grant any incentive stock options, but recognized compensation costs of $89,747 based on the fair value of the options vested for the six months ended June 30, 2015.

 

A summary of the Company’s stock option activity and related information follows:

 

			June 30, 2015
							Weighted
			Number				average
			of				exercise
			Options				price
	Outstanding, beginning of period			4,404,643			$	0.43
	Granted			-				-
	Exercised			-				-
	Forfeited/Expired			(449,999	)			0.44
	Outstanding, end of period			3,954,644			$	0.43
	Exercisable at the end of period			2,450,520			$	0.39
	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 June 30, 2015 was as follows:

 

												Weighted				Weighted				Weighted
												Average				Average				Average
				Stock				Stock				Remaining				Exercise Price				Exercise Price
		Exercisable		Options				Options				Contractual				of Options				of Options
		Prices		Outstanding				Exercisable				Life (years)				Outstanding				Exercisable
	$	0.43 - 4.20			1,321,978				1,118,562				1.05 - 8.21			$	0.46			$	0.46
	$	0.29			500,000				500,000				8.01
	$	0.41 - 0.44			1,382,666				691,333				8.21			$	0.53			$	0.53
	$	0.19			750,000				140,625				9.27
					3,954,644				2,450,520

  

 

ORIGINCLEAR, INC.

(formerly ORIGINOIL, INC.)

NOTES TO CONDENSED FINANCIAL STATEMENTS – (UNAUDITED)

SIX MONTHS ENDED JUNE 30, 2015

 

6.	OPTIONS AND WARRANTS (Continued)

 

The intrinsic value of the outstanding options, as of June 30, 2015 was $0, as they are underwater.

 

Stock-based compensation expense recognized during the period is based on the value of the portion of stock-based payment awards that is ultimately expected to vest. Stock-based compensation expense recognized in the financial statements of operations during the six months ended June 30, 2015 was $89,747.

 

Restricted Stock to CEO

On November 13, 2014, 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 40,000,000 shares of the Company’s common stock to the CEO provided certain milestones are met in certain stages; a) If the Company’s Market Capitalization (the market capitalization shall mean the total number of shares of issued and outstanding common stock, multiplied by the average closing trade price of the Company’s common stock on the 10 trading days immediately prior to the date of determination) exceeds $15,000,000, the Company will issue up to 16,000,000 shares of its common stock; b) If the Company’s Market Capitalization exceeds $20,000,000, the Company will issue up to 24,000,000 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 beginning upon the earlier of July 1, 2015 or the first date that any other eligible individual’s shares of restricted stock become eligible.

 

Restricted Stock to Employees

On November 13, 2014, the Company entered into RSGAs with the employees of OriginClear Inc. (formerly OriginOil, Inc.), for the economic performance of the Company. All shares issuable under the RSGAs are performance based shares and none have yet vested nor have any been issued. The RSGAs provides for the issuance of up to 26,050,000 shares of the Company’s common stock to the Employees provided certain milestones are met in certain stages; a) If the Company’s consolidated gross revenue, calculated in accordance with generally accepted accounting principles, consistently applied, equals or exceeds $2,500,000 for the trailing twelve month period as reported in the Company’s quarterly or annual financial statements, the Company will issue up to 10,420,000 shares of its common stock; b) If the Company’s consolidated net profit, calculated in accordance with generally accepted accounting principles, consistently applied, equals or exceeds $500,000 for the trailing twelve month period as reported in the Company’s quarterly or annual financial statements, the Company will issue up to 15,630,000 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.

 

Warrants

During the six months ended June 30, 2015, the Company did not grant any warrants.

 

A summary of the Company’s warrant activity and related information follows:

 

			June 30, 2015
							Weighted
							average
							exercise
			Options				price
	Outstanding - January 1, 2015			30,946,563			$	0.27
	Granted			-				-
	Exercised			(6,523,624	)			0.19
	Forfeited			(159,513	)			8.40
	Outstanding - June 30, 2015			24,263,426			$	0.29

At June 30, 2015, 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				22,855,390				22,855,390			0.02 - 2.93
	$	0.26 - 5.70				866,362				866,362			0.10 - 3.22
	$	0.90 - 8.70				541,674				541,674			0.21 - 7.39
						24,263,426				24,263,426

 

 

7.	SUBSEQUENT EVENTS

 

Management evaluated subsequent events as of the date of the financial statements pursuant to ASC TOPIC 855, and reported the following events:

 

Between July 1, 2015 and July 31, 2015, the Company sold to accredited investors 3,066,670 shares of common stock for aggregate consideration of $92,000. Shares issued in this offering are subject to certain price protection for a period of one year from the issuance of the shares.

 

On July 16, 2015, a holder of convertible promissory notes, known in our filings as “Convertible Promissory Notes”, converted an aggregate principal amount of $70,000, plus unpaid interest amount of $8,170 into an aggregate of 5,194,011 shares of the Company’s common stock.

 

On July 31, 2015, the Company issued 60,680 shares of common stock for services at a fair value of $2,549.

 

On July 31, 2015, the Company entered into a Share Exchange Agreement (the “Share Exchange Agreement”) with Progressive Water Treatment, Inc., a Texas corporation (“PWT”) and Marc Stevens, PWT’s sole shareholder (“Stevens”).  Upon the satisfaction or waiver of the conditions in the agreement, but in no event later than October 31, 2015 (the “Closing Date”), the Company will acquire PWT from 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, to be created by the Company prior to the Closing Date, using the form of Certificate of Designation attached as an exhibit to the Share Exchange Agreement. Each share of Series B Preferred Stock will have a stated value of $150 per share and will be convertible into shares of the Company’s common stock at a conversion price of $0.03 per share, which may be converted to the Company’s common stock in three annual increments beginning 12 months from closing. The Series B Preferred Stock shall be entitled to vote with 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 shall be entitled to cast one vote for each share of Series B Preferred Stock owned. Consummation of the Exchange is subject to a number of closing conditions, including, among other things, (i) the satisfaction of due diligence by the parties of each other, (ii) the accuracy of the representations and warranties, subject to customary materiality qualifiers; and (iii) the execution of an employment agreement by Stevens, in the form of the Employment Agreement attached to the Share Exchange Agreement.

 

On August 4, 2015, the Company’s board of directors authorized the issuance of an aggregate of 3,282,410 shares of the Company’s common stock to former holders of warrants who previously exchanged their warrants for an aggregate of 4,923,624 shares of the Company’s common stock. The additional issuance of shares was made as a result of an adjustment to the purchase price for the exchange. Shares issued in the exchange, including the additional shares, are subject to certain price protection for a period of one year from the exchange.

 

On August 4, 2015, the Company’s board of directors authorized the issuance of an aggregate of 2,000,000 shares to consultants of the Company in lieu of cash consideration.

 

 

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations.

 

This Form 10-Q contains forward-looking statements that are subject to a number of risks and uncertainties, many of which are beyond our control, which may include statements about our:

 

	●	business strategy;
	●	financial strategy;
	●	intellectual property;
	●	production;
	●	future operating results; and
	●	plans, objectives, expectations and intentions contained in this report that are not historical.

 

All statements, other than statements of historical fact included in this report, regarding our strategy, intellectual property, future operations, financial position, estimated revenues and losses, projected costs, prospects, plans and objectives of management are forward-looking statements. When used in this report, the words “could,” “believe,” “anticipate,” “intend,” “estimate,” “expect,” “project” and similar expressions are intended to identify forward-looking statements, although not all forward-looking statements contain such identifying words. All forward-looking statements speak only as of the date of this report. You should not place undue reliance on these forward-looking statements. Although we believe that our plans, intentions and expectations reflected in or suggested by the forward-looking statements we make in this report are reasonable, we can give no assurance that these plans, intentions or expectations will be achieved.  These statements may be found under “Management's Discussion and Analysis of Financial Condition and Results of Operations,” as well as in this report generally.  Actual events or results may differ materially from those discussed in forward-looking statements as a result of various factors.  In light of these risks and uncertainties, there can be no assurance that the forward-looking statements contained in this filing will in fact occur 

 

Organizational History

 

OriginClear, Inc. (“we”, “us”, “our”, the “Company” or “OriginClear”), formerly OriginOil, Inc., was incorporated on June 1, 2007 under the laws of the State of Nevada.  We have only been engaged in our current and proposed business operations since June 2007, and to date, we have been primarily involved in research and development activities.  Our principal offices are located at 5645 West Adams Blvd., Los Angeles, California 90016. Our telephone number is (323) 939-6645. Our website address is www.originclear.com. Our website and the information contained on our website are not incorporated into this quarterly report.

 

In addition to announcing material financial information through our investor relations website, press releases, SEC filings and webcasts, we also intend to use the following social media channels as a means of disclosing information about our products, our planned financial and other announcements, our attendance at upcoming investor and industry conferences, and other matters and for complying with our disclosure obligations under Regulation FD:

               

●

OriginClear’s Twitter Account (https://twitter.com/originclear)

 

●

OriginClear’s Facebook Page (https://www.facebook.com/originclear)

 

The information we post through these social media channels may be deemed material. Accordingly, investors should monitor these accounts, in addition to following the company’s website, press releases, SEC filings, public conference calls and webcasts. This list may be updated from time to time. 

 

We have not incorporated by reference into this report the information in, or that can be accessed through, our website or social media channels, and you should not consider it to be a part of this report.

 

Overview of Business

 

OriginClear is the proprietary developer of Electro Water Separation™ (EWS), the high-speed, primarily chemical-free technology to clean up large quantities of water. It removes oils, suspended solids, certain dissolved solids, and pathogens, in a continuous and energy-efficient process.

 

The company originally developed this technology to solve the challenge of removing microalgae from a highly dilute state. The electro-chemical process was then extended, first to cleaning up oil and gas waste water and most recently, to industrial, agricultural and urban waste. EWS is entirely electrical in nature and does not rely on algae for its cleaning capabilities.

 

 

EWS is designed to be an early step in removal of oils, solids and pathogens; reducing the work that more expensive, downstream processes must do, therefore enabling more cost-efficient and high-volume water cleanup overall. In addition, the technology shows promise in neutralizing hard-to-remove contaminants such as ammonia (NH₃), phosphorus (P) and hydrogen sulfide (H₂S).

 

OriginClear is a technology company. Our technology integrates easily with other industry processes. We have begun to embed our technology into larger systems through licensing and joint ventures.

 

Our business model is based on licensing our technology to original equipment manufacturers (OEMs), distributors, resellers, service providers and other licensees. At our Los Angeles laboratory, we build lab and demo-scale machines in-house for our new licensees.

 

In addition to commercializing our breakthrough technology, we have begun the process to acquire profitable, US-based service companies in the waste water treatment marketplace, with the intention of creating a family of OriginClear companies.

 

Critical Accounting Policies

 

The Securities and Exchange Commission ("SEC") defines "critical accounting policies" as those that require application of management's most difficult, subjective or complex judgments, often as a result of the need to make estimates about the effect of matters that are inherently uncertain and may change in subsequent periods. Not all of the accounting policies require management to make difficult, subjective or complex judgments or estimates. However, the following policies could be deemed to be critical within the SEC definition. 

 

 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.

 

Use of Estimates

 

The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the amounts reported in the accompanying financial statements. Significant estimates made in preparing these financial statements include the estimate of useful lives of property and equipment, the deferred tax valuation allowance, and the fair value of stock options, warrants, convertible notes and common stock for services. Actual results could differ from those estimates.

 

Fair Value of Financial Instruments

 

Fair value of financial instruments requires disclosure of the fair value information, whether or not recognized in the balance sheet, where it is practicable to estimate that value. As of June 30, 2015, the amounts reported for cash, prepaid expenses, accounts payable and accrued expenses approximate the fair value because of their short maturities.

  

Recently Issued Accounting Pronouncements

 

Management reviewed accounting pronouncements issued during the six months ended June 30, 2015, and no pronouncements were believed by management to have a material impact on our present or future financial statements.

  

Results of Operation

 

Results of Operations for the three months ended June 30, 2015 compared to the three months ended June 30, 2014.

              

Revenue and Cost of Goods Sold

 

Revenue for the three months ended June 30, 2015 and 2014 was $88,710 and $0, respectively. Cost of goods sold for the three months ended June 30, 2015 and 2014 were $58,130 and $0, respectively. The increase in revenue and cost of sales was due to an increase in equipment sold and the related material supplies and contractor fees for equipment production.

 

To date we have had minimal revenues due to our focus on product development and testing.  In addition, we are not focused on immediate sales of equipment but on licensing, private labeling type transactions and acquisitions, which we believe have the potential to yield stronger long term revenue.

 

 

Operating Expenses

 

Selling and General Administrative Expenses

 

Selling and general administrative (“SG&A”) expenses decreased by $1,109,824 to $1,325,401 for the three months ended June 30, 2015, compared to $2,435,225 for the three months ended June 30, 2014. The decrease in SG&A expenses was due primarily to a decrease in marketing expense of $267,591, a decrease in outside services of $812,756, of which $809,370 of the decrease was non-cash for shares issued for services, and an overall decrease in other SG&A expenses of $29,477.

 

Research and Development Cost

 

Research and development (“R&D”) cost decreased by $31,204 to $201,386 for the three months ended June 30, 2015, compared to $232,590 for the three months ended June 30, 2014. The decrease in overall R&D costs was primarily due to a decrease in the purchase of durable items for testing. R&D costs have consisted of material supplies and testing for EWS appliances.

  

Other Income and (Expenses)

 

Other income and expenses decreased by $2,201,064 to ($278,873) for the three months ended June 30, 2015, compared to ($2,479,937) for the three months ended June 30, 2014. The decrease was the result of a decrease in non-cash accounts associated with the fair value of the derivatives in the amount of $1,808,220, amortization of debt discount of $248,407, fair value of discounted warrants of $149,807, and commitment fees of $38,540, offset by an increase in, interest expense of $42,358, and loss on sale of asset of $1,552. 

 

Net Loss

 

Our net loss decreased by $3,372,087 to $1,779,780 for the three months ended June 30, 2015, compared to a net loss of $5,151,867 for the three months ended June 30, 2014. The majority of the decrease in net loss was due primarily to a decrease in other income and (expenses) in the amount of $2,201,064 and a decrease in total operating expenses of $1,140,443, with an increase in gross profit of $30,580.  Currently operating costs exceed revenue because sales are not yet sufficient to cover costs.  We cannot assure of when or if revenue will exceed operating costs.

 

Results of Operations for the six months ended June 30, 2015 compared to the six months ended June 30, 2014.

 

Revenue and Cost of Goods Sold

 

Revenue for the six months ended June 30, 2015 and 2014 was $136,280 and $159,410, respectively. Cost of goods sold for the six months ended June 30, 2015 and 2014 were $86,294 and $105,970, respectively. The decrease in revenue and cost of sales was due to a decrease in equipment sold and the related material supplies and contractor fees for equipment production.

 

To date we have had minimal revenues due to our focus on product development and testing.  In addition, we are not focused on immediate sales of equipment but on licensing or private labeling type transactions, which we believe has the potential to yield stronger long term revenue.

 

Operating Expenses

 

Selling and General Administrative Expenses

 

Selling and general administrative (“SG&A”) expenses decreased by $1,404,537 to $2,296,539 for the six months ended June 30, 2015, compared to $3,701,076 for the six months ended June 30, 2014. The decrease in SG&A expenses was due primarily to a decrease in marketing expense of $553,151 of which $137,899 of the decrease was non-cash for shares issued for services, a decrease in outside services of $882,673, of which $821,870 of the decrease was non-cash for shares issued for services, and an overall decrease in other SG&A expenses of $122,294, offset by an increase in professional fees of $153,581.

 

Research and Development Cost

 

Research and development (“R&D”) cost decreased by $18,695 to $460,742 for the six months ended June 30, 2015, compared to $479,437 for the six months ended June 30, 2014. The decrease in overall R&D costs was primarily due to a decrease in the purchase of durable items for testing. R&D costs have consisted of material supplies and testing for EWS appliances.

  

Other Income and (Expenses)

 

Other income and expenses decreased by $4,496,690 to ($752,377) for the six months ended June 30, 2015, compared to ($5,249,067) for the six months ended June 30, 2014. The decrease was the result of a decrease in non-cash accounts associated with the fair value of the derivatives in the amount of $4,116,894, amortization of debt discount of $473,251, and gain on investment of $6,353, offset by an increase in interest expense of $72,393, loss on sale of asset of $1,552, and commitment fees of $13,157.

 

 

Net Loss

 

Our net loss decreased by $5,915,268 to $3,468,843 for the six months ended June 30, 2015, compared to a net loss of $9,384,111 for the six months ended June 30, 2014. The majority of the decrease in net loss was due primarily to a decrease in other income and (expenses) in the amount of $4,496,690 and a decrease in total operating expenses of $1,422,032, with a decrease in gross profit of $3,454.  Currently operating costs exceed revenue because sales are not yet sufficient to cover costs.  We cannot assure of when or if revenue will exceed operating costs.

 

Liquidity and Capital Resources

 

Liquidity is the ability of a company to generate funds to support its current and future operations, satisfy its obligations, and otherwise operate on an ongoing basis. Significant factors in the management of liquidity are funds generated by operations, levels of accounts receivable and accounts payable and capital expenditures.

 

The condensed 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 financial statements do not reflect any adjustments that might result if we are unable to continue as a going concern. During the six months ended June 30, 2015, we did not generate significant revenue, incurred a net loss of $3,468,843 and cash used in operations of $1,725,283. As of June 30, 2015, we had a working capital deficiency of $8,512,410 and a shareholders’ deficit of $8,382,509. These factors, among others raise substantial doubt about our ability to continue as a going concern. Our independent auditors, in their report on our audited financial statements for the year ended December 31, 2014 expressed substantial doubt about our ability to continue as a going concern. The ability of us to continue as a going concern and appropriateness of using the going concern basis is dependent upon, among other things, additional cash infusion. We have obtained funds from our shareholders in the six months ended June 30, 2015, and have standing purchase orders and open invoices with customers. Management believes this funding will continue from our current investors and has also obtained funding from new investors. Management believes the existing shareholders, the prospective new investors and future revenue will provide the additional cash needed to meet our obligations as they become due, and will allow the development of our core business operations.

 

At June 30, 2015 and December 31, 2014, we had cash of $180,699 and $198,384, respectively and working capital deficit of $8,512,410 and $7,330,957, respectively.  The increase in working capital deficit was due primarily to an increase in non-cash derivative liabilities, convertible notes, work-in-process, prepaid expenses, and accrued expenses, with a decrease in cash, accounts payable and deferred income.

 

During the first six months of 2015, we raised an aggregate of $1,415,000 in an offering of unsecured convertible notes, $246,181 from the exercise of warrants and $57,500 from the sale of shares of our common stock. During the subsequent period through August 3, 2015, we raised an aggregate of $82,000 from the sale of shares of our common stock. Our ability to continue as a going concern is dependent upon raising capital from financing transactions and future revenue.

 

Net cash used in operating activities was $1,725,283 for the six months ended June 30, 2015, compared to $2,429,457 for the prior period ended June 30, 2014. The decrease of $704,174 in cash used in operating activities was due to the net decrease in other assets, deferred income, and net loss due to a decrease in non-cash accounts associated with the derivatives, with an increase in work in process, prepaid expenses, accounts payable and accrued expenses. Currently operating costs exceed revenue because sales are not yet significant.

 

Net cash flows used in investing activities was $11,082 for the six months ended June 30, 2015, as compared to $4,397 for the prior period ended June 30, 2014. The net increase in cash used in investing activities was due to a decrease in the proceeds from sale of investment in the prior period.

 

 Net cash flows provided by financing activities was $1,718,680 for the six months ended June 30, 2015, as compared to $2,265,000 for the prior period ended June 30, 2014. The decrease in cash provided by financing activities was due to a decrease in equity and debt financing with the issuance of convertible notes. To date we have principally financed our operations through the sale of our common stock and the issuance of debt.

  

We do not have any material commitments for capital expenditures during the next twelve months.  Although our proceeds from the issuance of equity and convertible debt together with revenue from operations are currently sufficient to fund our operating expenses, we will need to raise additional funds in the future so that we can expand our operations. Therefore, our future operations are dependent on our ability to secure additional financing.  Financing transactions may include the issuance of equity or debt securities, obtaining credit facilities, or other financing mechanisms. However, the trading price of our common stock and a downturn in the U.S. equity and debt markets could make it more difficult to obtain financing through the issuance of equity or debt securities. Even if we are able to raise the funds required, it is possible that we could incur unexpected costs and expenses, fail to collect significant amounts owed to us, or experience unexpected cash requirements that would force us to seek alternative financing. Furthermore, if we issue additional equity or debt securities, stockholders may experience additional dilution or the new equity securities may have rights, preferences or privileges senior to those of existing holders of our common stock. The inability to obtain additional capital may restrict our ability to grow and may reduce our ability to continue to conduct business operations. If we are unable to obtain additional financing, we may have to curtail our marketing and development plans and possibly cease our operations.

  

 

We have estimated our current average burn, and believe that we have assets to ensure that we can function without liquidation over the next six months, due to our cash on hand, growing revenue, and our ability to raise money from our investor base.  Based on the aforesaid, we believe we have the ability to continue our operations for the foreseeable future and will be able to realize assets and discharge liabilities in the normal course of operations.

 

Off-Balance Sheet Arrangements

 

We do not have any off balance sheet arrangements that are reasonably likely to have a current or future effect on our financial condition, revenues, and results of operations, liquidity or capital expenditures.

 

Item 3.  Quantitative and Qualitative Disclosures About Market Risk.

 

We are a smaller reporting company as defined by Rule 12b-2 of the Securities Exchange Act of 1934 and are not required to provide the information under this item.

 

Item 4.  Controls and Procedures.

 

Evaluation of Disclosure Controls and Procedures

 

We have adopted and maintain disclosure controls and procedures (as such term is defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as amended (the “Exchange Act”)) that are designed to ensure that information required to be disclosed in our reports under the Exchange Act, is recorded, processed, summarized and reported within the time periods required under the SEC’s rules and forms and that the information is gathered and communicated to our management, including our Chief Executive Officer (Principal Executive Officer and Principal Financial Officer), as appropriate, to allow for timely decisions regarding required disclosure.

 

As required by SEC Rule 15d-15(b), our Chief Executive Officer and Chief Financial Officer carried out an evaluation under the supervision and with the participation of our management, of the effectiveness of the design and operation of our disclosure controls and procedures pursuant to Exchange Act Rule 15d-14 as of the end of the period covered by this report. Based on the foregoing evaluation, our Chief Executive Officer and Chief Financial Officer concluded that our disclosure controls and procedures are effective in timely alerting them to material information required to be included in our periodic SEC filings and to ensure that information required to be disclosed in our periodic SEC filings is accumulated and communicated to our management, including our Chief Executive Officer and Chief Financial Officer, to allow timely decisions regarding required disclosure about our internal control over financial reporting.

 

Changes in Internal Controls

 

There have been no changes in our internal control over financial reporting during the most recent fiscal quarter ended June 30, 2015 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

  

 

PART II

 

Item 1.  Legal Proceedings.

 

None.

 

Item 1A. Risk Factors.  

 

We are a smaller reporting company as defined by Rule 12b-2 of the Securities Exchange Act of 1934 and are not required to provide the information under this item.

 

Item 2.  Unregistered Sales of Equity Securities and Use of Proceeds.

 

None.

 

Item 3.  Defaults Upon Senior Securities.

 

None.

 

Item 4.  Mine Safety Disclosures

 

Not applicable.

 

Item 5.  Other Information.

 

The following disclosure would have otherwise been filed on Form 8-K under the heading “Item 3.02 Unregistered Sales of Equity Securities”:

 

Consultant Issuances

 

On August 4, 2015, our board authorized the issuance of an aggregate of 2,000,000 shares of our common stock to consultants in lieu of cash consideration.

 

The securities above were offered and sold pursuant to an exemption from the registration requirements under Section 4(a)(2) of the Securities Act (the “Securities Act”) and Rule 506 of Regulation D promulgated thereunder since, among other things, the transactions did not involve a public offering and the securities were acquired for investment purposes only and not with a view to or for sale in connection with any distribution thereof.

 

Warrant Exchange Adjustment

 

On August 4, 2015, our board of directors authorized the issuance of an aggregate of 3,282,410 shares of our common stock to former holders of warrants who previously exchanged their warrants for an aggregate of 4,923,624 shares of our common stock. The additional issuance of shares was made as a result of an adjustment to the purchase price for the exchange. Shares issued in the exchange, including the additional shares, are subject to certain price protection for a period of one year from the exchange.

 

The securities above were offered and sold pursuant to an exemption from the registration requirements under Section 4(a)(2) of the Securities Act and Rule 506 of Regulation D promulgated thereunder since, among other things, the transactions did not involve a public offering and the securities were acquired for investment purposes only and not with a view to or for sale in connection with any distribution thereof.

 

Private Placement

 

As previously reported on July 1, 2015 and July 24, 2015, on June 25, 2015, the Company commenced a private placement offering of up to $2,000,000 of its shares of common stock. On July 31, 2015, the Company sold to an accredited investor 333,334 shares of common stock for consideration of $10,000. Shares issued in this offering are subject to certain price protection for a period of one year from the issuance of the shares.

The securities above were offered and sold pursuant to an exemption from the registration requirements under Section 4(a)(2) of the Securities Act and Rule 506 of Regulation D promulgated thereunder since, among other things, the transactions did not involve a public offering and the securities were acquired for investment purposes only and not with a view to or for sale in connection with any distribution thereof.

 

Item 6.  Exhibits.

 

Exhibit Number		Description of Exhibit
31		Certification by Chief Executive Officer and Chief Financial Officer, required by Rule 13a-14(a) or Rule 15d-14(a) of the Exchange Act.
32		Certification by Chief Executive Officer and Chief Financial Officer, required by Rule 13a-14(b) or Rule 15d-14(b) of the Exchange Act and Section 1350 of Chapter 63 of Title 18 of the United States Code.
101.INS		XBRL Instance Document.*
101.SCH		XBRL Taxonomy Extension Schema.*
101.CAL		XBRL Taxonomy Extension Calculation Linkbase.*
101.DEF		XBRL Taxonomy Extension Definition Linkbase.*
101.LAB		XBRL Taxonomy Extension Label Linkbase.*
101.PRE		XBRL Extension Presentation Linkbase.*

 

*

Attached as Exhibit 101 to this report are the following financial statements from the Company’s Quarterly Report on Form 10-Q for the quarter ended June 30, 2015 formatted in XBRL (eXtensible Business Reporting Language): (i) the Balance Sheets, (ii) the Statement of Operations, (iii) the Statement of Shareholders’ Equity, (iv) the Statement of Cash Flow, and (v) Notes to Financial Statements.

 

 

SIGNATURES

 

In accordance with the requirements of the Exchange Act, the registrant caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.

 

	ORIGINCLEAR, INC.
	By:	/s/ T Riggs Eckelberry
		T Riggs Eckelberry
		Chief Executive Officer (Principal Executive Officer)
		and Acting Chief Financial Officer  (Principal Accounting and Financial Officer)
		August 5, 2015

 

 

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