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EX-3.12 - CERTIFICATE OF WITHDRAWAL OF CERTIFICATE OF DESIGNATION OF SERIES A PREFERRED ST - ORIGINCLEAR, INC.f10k2016ex3xii_originclear.htm
EX-32 - CERTIFICATION - ORIGINCLEAR, INC.f10k2016ex32_originclear.htm
EX-31 - CERTIFICATION - ORIGINCLEAR, INC.f10k2016ex31_originclear.htm

 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

FORM 10-K

 

    ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

 

For the fiscal year ended December 31, 2016

Or

 

    TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

 

For the transition period from   ___________ to ___________

 

Commission file number: 333-147980

 

ORIGINCLEAR, INC.

(Exact name of registrant as specified in charter)

 

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

 

525 S. Hewitt Street, Los Angeles, California 90013

(Address of principal executive offices) (Zip Code)

 

Registrant's telephone Number: (323) 939-6645

 

Securities registered pursuant to Section 12(b) of the Act: None

Securities registered pursuant to Section 12(g) of the Act: None

 

Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.

Yes ☒ No

 

Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act.

Yes ☒ No

 

Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities 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 if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. ☒

 

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”, “non-accelerated filer”, and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):

 

Large Accelerated Filer Accelerated Filer  ☐
Non-accelerated Filer ☐ (Do not check if a smaller reporting company) 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 aggregate market value of the voting stock held by non-affiliates of the registrant was approximately $4,225,016 based upon the closing sales price of the registrant’s common stock on June 30, 2016 of $0.01 per share.

 

At March 30, 2017, 1,058,011,175 shares of the registrant’s common stock were outstanding.

 

DOCUMENTS INCORPORATED BY REFERENCE: NONE

 

 

 

 

 

 

TABLE OF CONTENTS

 

    Page
  PART I  
Item 1. Business 1
Item 1A. Risk Factors 21
Item 1B. Unresolved Staff Comments 29
Item 2. Properties 29
Item 3. Legal Proceedings 29
Item 4. Mine Safety Disclosures 29
     
  PART II  
Item 5. Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities 30
Item 6 Selected Financial Data 30
Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations 31
Item 7A. Quantitative and Qualitative Disclosures About Market Risk 35
Item 8. Financial Statements and Supplementary Data 35
Item 9. Changes in and Disagreements With Accountants on Accounting and Financial Disclosure 35
Item 9A. Controls and Procedures 36
Item 9B. Other Information 36
     
  PART III  
Item 10. Directors, Executive Officers and Corporate Governance 37
Item 11. Executive Compensation 40
Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters 42
Item 13. Certain Relationships and Related Transactions, and Director Independence 44
Item 14. Principal Accountant Fees and Services 44
Item 15. Exhibits, Financial Statement Schedules 45
   
SIGNATURES 46

 

 

 

 

PART I

 

This Form 10-K 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,”  “Business,” “Properties,” 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, including, without limitation, the risks outlined under “Risk Factors” and matters described in this report generally.  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.

 

ITEM 1. BUSINESS.

 

Organizational History

 

OriginClear, Inc. (“we”, “us”, “our”, the “Company” or “OriginClear”) was incorporated on June 1, 2007 under the laws of the State of Nevada. We have been engaged in business operations since June 2007. We recently moved into the commercialization phase of our business plan having previously been primarily involved in research, development and licensing activities. Our principal offices are located at 525 South Hewitt Street, Los Angeles, California 90013. Our main telephone number is (323) 939-6645. Our website address is www.OriginClear.com. 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)
     
  OriginClear’s LinkedIn Page (https://www.linkedin.com/company/2019598)

 

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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 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 a leading provider of water treatment solutions and the developer of a breakthrough water cleanup technology. Through its wholly owned subsidiaries, OriginClear provides systems and services to treat water in a wide range of industries, such as municipal, pharmaceutical, semiconductors, industrial, and oil & gas. To rapidly grow this segment of the business, we strategically acquire profitable and well-managed water treatment companies, which allow us to expand our global market presence and technical expertise. To enable a new era of clean and socially responsible water treatment solutions, we invented Electro Water Separation™, a breakthrough high-speed water cleanup technology using multi-stage electrochemistry, that we license worldwide to water treatment equipment manufacturers. Water is our most valuable resource, and the mission of The OriginClear Group™ (the “Group”) is to improve the quality of water and help return it to its original and clear condition.

 

OriginClear Group™

 

Outsourcing is a fast-growing reality in water treatment. Tougher regulations, water scarcities and general outsourcing trends are driving industrial and agricultural water treatment users to delegate their water problem to service providers. As Global Water Intelligence pointed out in their report on October 30, 2015, “Water is often perceived as a secondary importance, with end-users increasingly wanting to focus solely on their own core business. This is driving a move away from internal water personnel towards external service experts to take control of water aspects.” External service experts are typically small–privately owned and locally operated. Consolidating these companies could lead to enormous economies of scale through sharing of best practices, technologies, and customers.

 

Decentralization is an even greater trend in water, similar to what has been seen in energy decentralization through solar and wind off-grid generation.

 

​ Water is becoming increasingly scarcer. ​McKinsey’s Transforming ​Water Economies ​forecasts that ​“without ​action, global ​water demand ​could outstrip ​supply by up to ​40 percent by ​2030.” ​Furthermore, existing water infrastructure in the United States is aging and water loss is increasing.

 

According to ​Lux Research, ​updating our ​national water ​infrastructure ​will require an ​investment of $​270 billion ​– money ​that will be ​hard to pull ​together for ​projects that ​could take ​decades to ​complete. ​In the meantime, centralized water systems are forcing water users to treat their own ​water with ​small, modular ​water treatment ​systems.

 

OriginClear is ​acquiring ​companies to ​help industrial ​water users ​treat their ​water ​themselves, and often reuse ​it. We believe ​those companies ​are going to ​grow tremendously ​because of this ​“local ​water” ​growth trend. ​We believe that assembling a group of water treatment companies is an opportunity for significant growth and increased Company value for the stockholders.

 

Progressive Water Treatment

 

On October 1, 2015, OriginClear announced it had acquired 100 percent of Dallas-based Progressive Water Treatment Inc. (PWT), a profitable and fast-growing designer, builder and service provider for a wide range of industrial water treatment applications.

 

This marked the first transaction in OriginClear’s corporate strategy to rapidly acquire leading U.S. water service companies focused on specialized water treatment. OriginClear aims to offer a complementary, end-to-end offering to serve growing corporate demand for outsourced water treatment. The Company acquired PWT through the exchange of all issued and outstanding shares of PWT 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.

 

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PWT’s Business

 

Since 1995, PWT has been designing and manufacturing a complete line of water treatment systems for municipal, industrial and pure water applications. Known as an OEM (Original Equipment Manufacturer), PWT utilizes a wide range of technologies, including chemical injection, media filters, membrane, ion exchange and SCADA technology, in turnkey systems that it designs and builds. PWT also offers a broad range of services including maintenance contracts, retrofits and replacement assistance. In addition, PWT rents equipment through contracts of varying duration. Customers are primarily served in the United States and Canada, with PWT’s reach extending worldwide from Japan to Argentina to the Middle East.

 

On January 12, 2016, we announced that Minnesota-based public utility, Xcel Energy (NYSE:XEL), awarded PWT a large-scale contract for a boiler feedwater treatment system. The contract totaled nearly two million dollars and uniquely utilizes all Dow Chemical (NYSE:DOW) products, including Ultrafiltration (UF), Reverse Osmosis (RO) and Electrodeionization (EDI) processes. On January 17, 2017, we announced that PWT had recently completed the installation and startup of this project. This was the third large power plant project that PWT designed, built, installed and successfully started up, bringing the total such orders to approximately $3.5 million for 2016.

 

On November 21, 2016, OriginClear designated PWT as its first complete systems manufacturer, and plans to make PWT its first complete systems manufacturer for both licensees and end-users. We believe that acquired companies in the Group can become captive distribution points for its technology.

 

OriginClear is currently in discussions for additional, accretive acquisitions of companies specializing in complementary markets and applications.

 

Technology Licensing

 

For its first eight years of operations, OriginClear focused uniquely on development and commercialization of its breakthrough Electro Water Separation™ technology. In 2015, the technology went into commercial phase, and the Company launched it as OriginClear Technologies, operating in parallel to the Group. The mission of OriginClear Technologies is to develop Electro Water Separation™ and achieve its full recognition as an international industry standard in treating our increasingly complex wastewater treatment challenges. For this purpose, OriginClear Technologies relies on an ongoing strong R&D and engineering activity for the development of its technology, while actively building its network of partners, licensees and joint venture partners for commercial development. A key element of this strategy is OriginClear (HK), OriginClear’s wholly-owned subsidiary in Hong Kong that manages Asia-Pacific market development, with a special focus on China sales and manufacturing. While OriginClear Technologies focuses on developing and monetizing the Company’s internally-developed Intellectual Property, best practices and trade secrets, it is expected to do the same for technologies which may come in the future with the Group’s acquisition of profitable water treatment companies.

 

The Technology

 

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 EWS technology remains the most efficient non-chemical, continuous mechanism for the concentration of live algae cells from water.

 

The electro-chemical process was then extended, first to cleaning up oil and gas waste water and most recently, to industrial, agricultural and urban effluents. These water treatment applications are entirely electrochemical in nature and do not rely on algae for its cleaning capabilities, which is a separate application of the technology. EWS is designed to be an early step in removal of oils, solids and pathogens; reducing the work that more expensive, downstream processes such as Ultra Filtration or Reverse Osmosis must do, therefore enabling more cost-efficient and high-volume water cleanup overall.

 

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In March of 2016, OriginClear announced that it had successfully developed and proved Advanced Oxidation for its breakthrough water cleanup system, Electro Water Separation™, or EWS. University laboratory tests have shown that EWS with Advanced Oxidation (EWS:AOx™) can now extract dissolved contaminants, which are otherwise difficult to remove without chemicals such as chlorine. Overall, the system has shown a dramatic reduction in Total Organic Compounds which includes all forms of organic contamination, solids, miscible or dissolved, to meet new stringent global discharge requirements. Even prior to this innovation, EWS, combined with an iSep ultrafiltration membrane, demonstrated up to a 99.9% removal of dispersed oil, 99.5% removal of suspended solids as well as successful treatment of chemical oxygen demand (COD), including specific contaminants such as ammonia, phosphorus and hydrogen sulfide. These results were presented at the International Water Conference in 2015. In 2016, OriginClear filed for a patent to protect the new AOx process and system configuration.

 

Today, we are capable of pairing the two technologies as EWS:AOx™, or separately, as the application requires. OriginClear believes that its technology is valuable to the industry because it has the potential to greatly extend the life of membranes and filters by effectively treating very dirty, oily water, while reducing chemical use significantly.

 

OriginClear also believes that its Advanced Oxidation technology will help neutralize harmful micro-contaminants, such as industrial solvents, which is difficult or impossible to achieve with other technologies.

 

Overall, the system has shown a dramatic reduction in Total Organic Compounds which includes all forms of organic contamination, solids, miscible or dissolved, to meet new stringent global discharge requirements.

 

Our technology partnership with California State University at Bakersfield (CSU Bakersfield) continued in 2016. On March 16, 2016, we announced that recent laboratory studies carried out under that partnership indicated the effectiveness of EWS:AOx, as measured by Reactive Oxygen Species (ROS) generation. ROS are the strongest oxidants that can be used in water. Their confirmed presence indicates the degree to which the system is able to remove organics from water without chlorine-generated Disinfection Byproducts, which are considered harmful in a waste water treatment system.

 

“EWS already generates 370mg per second of gas, which is more than twice the amount needed for the removal by electro-flotation of a 2000 mg/l solids contents wastewater stream,” said Dr. Luis Edgar Cabrales Arriaga, assistant professor at the Department of Physics and Engineering at CSU Bakersfield. “Now, we have confirmed that EWS with Advanced Oxidation also produces more than 330 g/m3 of mixed ROS species, such as hydrogen peroxide, for a similar average energy consumption of 1 kWh per m3 of treated water.”

 

Recent Developments

 

We have been engaged in our business operations since June 2007, and to date, we have been primarily involved in research and development activities, with licensing to OEMs, and sales of pilot and demonstration equipment beginning in June of 2010. Commercial sales by both OriginClear and its licensees and joint ventures began in 2014. 

 

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

 

In 2016, OriginClear accomplished the following:

 

Its PWT subsidiary upgraded water systems for three large public utilities, including Xcel Energy (NYSE:XEL), raising the total for these utility-scale water projects to approximately $3.5 million. By modernizing these plants, capacity increased significantly while labor and chemical costs were reduced.

 

Its French joint venture, Ennesys, completed a field pilot in Dubai of its FREEWATERBOX® modular waste water treatment system and partnered with a leading landscaping company in the GCC (Gulf Cooperation Countries) to build the first FREEWATERBOX intended to recycle 20 tons of food waste per day into clean water and high value fertilizer.

 

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OriginClear launched a joint venture in Texas to market an injectable crude oil sweetening liquid, produced with OriginClear technology. Sweet crude commands a 10% premium over sour.

 

Its joint venture in Malaysia began working with major growers to demonstrate its ability to treat Palm Oil Mill Effluent (POME). Totaling more than 65 million metric tons annually, POME effluent is widely recognized as a major environmental concern because its contamination level can be 100 times higher than domestic sewage.

 

OriginClear’s China subsidiary entered commercial negotiations after a successful demonstration of its ability to clean up the contaminants in ‘black water’ leachate coming out of landfills. OriginClear is continuing to pilot its process for a landfill leachate treatment system in China.

 

A regional water treatment facility in California’s Kern County commissioned a 60-day test of OriginClear’s technology to treating produced water from oil operations. Extensive third-party testing demonstrated that the technology was a technical success. OriginClear is currently in discussions with licensees and large end-users for the commercialization of produced water treatment in this leading region for oil production.

 

OriginClear was awarded the prestigious China BlueTech Award in the “Most Innovative Technology” category. Co-organized by Mandarin Environment and BlueTech™ Research, the China BlueTech™ Awards recognized OriginClear’s EWS technology for its potential to break through in both the Chinese and international markets.

 

North America

 

Produced water treatment

 

On August 10, 2016, OriginClear announced that OriginClear partner ECT Services & Solutions (ECT), unveiled a complete, modular system (“ECOPOD”), in operation at an oil field near Bakersfield, California, to achieve “Produced water to irrigation grade” in a single modular system. The ECOPOD pilot scale system uses OriginClear’s Electro Water Separation™ (EWS), requires no chemicals and reliably processes 340 barrels per day of oilfield produced water with minimal operator supervision.

 

Presenting at the “Tackling the Drought: Exploring Safe, Innovative Water Sources” conference at California State University at Bakersfield (CSUB), sponsored by the California Independent Petroleum Association and the California Energy Research Center, Talbott Howard, CEO and Founder of ECT, showed how ECOPOD System 1.0 can successfully and competitively treat produced water and recycle it into irrigation quality water for local beneficial reuse.

 

Following this achievement, OriginClear published a case study, demonstrating that extensive third-party testing demonstrated that the Bakersfield pilot program was a technical success (http://www.originclear.com/pdf/originclear-in-kern-2016.pdf).

 

We are in commercial discussions with ECT and two other potential licensees to follow up on the success of this program.

 

Crude oil sweetening

 

On April 15, 2016, OriginClear announced that Cobalt Aqua Control LLC (Cobalt) recently shipped its first commercial sale of 15 barrels of an injectable crude oil sweetening liquid, produced with OriginClear technology, to an oil operator in South Texas.

 

Cobalt is a developer of oil and gas technology and remediation solutions based in Houston, TX. OriginClear licensed its Advanced Oxidation (EWS:AOx™) technology to Cobalt, and, through a wholly-owned subsidiary, has a significant membership interest in Cobalt. Cobalt’s process produces a liquid that can significantly improve oil recovery, reduce corrosive gas in the crude stream and increase overall ROI for operators.

 

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Known as H2S-Neutralizer™ (H2S-N™), this injectable liquid has demonstrated a dramatic improvement in oil recovery ratios, as evidenced by a stable increase of well-head pressure. In addition, H2S-N has been shown to significantly reduce hydrogen sulfide (H2S) concentration in the crude stream.

 

Europe, Middle East and Africa

 

France and Gulf Cooperation Countries (GCC)

 

We are a joint venture partner in Ennesys, a French developer of algae-based waste management systems. In mid-2013, we installed a prototype EWS Waste unit at the Ennesys demonstration site which can process liquid waste, generating clean, nitrate-rich water to feed algae grown on the building’s roof as an energy source. In late 2013, we transferred three of our non-core patent applications to Ennesys.

 

In 2016, the FREEWATERBOX® developed by Ennesys completed a field pilot in Dubai. It is based on the use of micro-algae for the removal or biotransformation of pollutants, including nutrients and xenobiotics from wastewater and CO2 from waste air, while producing a soil conditioner for the enhancement and protection of agricultural crops.

 

Recently, Ennesys announced that it entered into a partnership with a leading landscaping company in the GCC (Gulf Cooperation Countries) to build the first FREEWATERBOX that will recycle 20 tons of food waste per day into high value liquid fertilizer, compost and algal biostimulant.

 

We continue to support Ennesys with technology and public communications although this joint venture is currently not generating revenue for the Company. 

 

France and North Africa

 

On January 5, 2017, OriginClear announced that it has responded to EU-level water infrastructure mandates by African governments by working with French engineering company UltraEpur.

 

UltraEpur contacted us to help rapidly clear up contaminated industrial water, beginning in Algeria, where the government intends to upgrade to developed-world water standards rapidly. We have since entered a technology license agreement, and UltraEpur purchased a laboratory demonstration unit.

 

OriginClear in Asia 

 

China

 

In December 2014, OriginClear announced that it launched a subsidiary, OriginClear (Hong Kong) (OCHK) and granted it a master license for the People’s Republic of China, with non-exclusive rights for Asia. It has since been renamed as OriginClear Technologies (Hong Kong).

 

On December 3, 2015, OriginClear and OCHK announced that OCHK had agreed with Mr. Ming Xu, an inventor and owner of a construction materials factory in mainland China to launch sales and manufacturing joint ventures (JVs) in the People’s Republic of China and the Republic of China (Taiwan). Mr. Xu made an initial payment of $150,000 at that time. On September 19, 2016, in response to new developments recent progress in building a network of multiple licensees, the parties agreed to a Partnership Memorandum of Understanding (MOU) pursuant to which the Company and Xu may enter into a license agreement and may launch an OriginClear Excellence Center, a joint venture intended to support licensees with technology training and maintenance, marketing and communications efforts, and providing additional resources such as synergistic third party technologies. However, there cannot be any assurance that any definitive agreements with Xu will be entered into.

 

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On March 16, 2016, we announced that we were in the commercial negotiation phase after a successful demonstration of our ability to clean up the ‘black water’ contaminants coming out of landfills. EWS alone achieved a 75% reduction in leachate’s Chemical Oxygen Demand, a marker of contamination level that includes suspended solids and dissolved contamination as well, and 70% reduction in Ammonia. Landfills in China and elsewhere generate tens of thousands of tons of leachate daily. This leachate, also known as black water, is a major challenge in wastewater treatment. OriginClear is continuing to pilot its process for a landfill leachate treatment system in China.

 

 On June 13, 2016, OCHK entered into a Joint Development and Commercialization Agreement with Hong Kong-based water treatment engineering and manufacturing firm Park Rich Environmental Technology Co., Ltd. (Park Rich), based on specific purchase orders from time to time and upon the terms that the parties agree to. In February, 2016, OriginClear had also signed a distribution agreement with Park Rich affiliate, Jovial Technology. Park Rich helped showcase OriginClear’s technology at the major water conference, Aquatech China, in Shanghai between June 15 and June 17, 2016.

 

At this show, OriginClear was awarded the prestigious China Blue Tech Award, as organized by BlueTech Research and Mandarin Environment in partnership with Aquatech China.

 

The third China partner named in 2016, with Xu and Park Rich, was DongYuan Environment Technology (DY), founded in 2009, focusing on heavy polluted industrial wastewater treatment, water recycling, brine processing, sludge drying and agriculture farming wastewater treatment. According to DongYuan, in 2012 the Chinese government honored it as a “High-New Technology Enterprise”. On September 19, 2016, we announced that DY placed an order for its first OriginClear demonstration system.

 

Malaysia

 

On March 22, 2016, OCHK agreed to launch a Joint Venture (JV) with Osmocell Malaysia SDN Bhd, a Malaysian engineering and manufacturing company for water purification systems. The JV company, OriginClear Water Solutions SDN Bhd (OWS) is now operational. OWS plans to target the Palm Oil Mill Effluent (POME) treatment market in Malaysia. Totaling more than 65 million tonnes annually, POME effluent is widely recognized as a major environmental concern because its contamination level can be 100 times higher than domestic sewage. Osmocell is currently proving the effectiveness of a system based on EWS in commercial pilots.

 

Looking Ahead

 

In 2017, OriginClear intends to achieve the following:

 

Further growth for PWT in large capacity system sales.

 

Serving end-users and licensees with complete systems that incorporate our breakthrough technology.

 

Revenue growth from our joint ventures and licenses in the oil industry in the USA, in industrial applications in Asia, and in water purification applications in the Middle East.

 

Continued efforts to acquire successful, profitable water service companies that can benefit from the major outsourcing and decentralizing trend in industrial water treatment.

 

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Corporate Developments

 

On May 1, 2016, OriginClear moved its headquarters from a warehouse and office facility on Adams Blvd in Los Angeles near Culver City, to the La Kretz Innovation Campus of the Los Angeles Cleantech Incubator (LACI) on Hewitt Street in downtown Los Angeles. This move refocused OriginClear headquarters activities on administration and science, making use of LACI’s extensive research and prototyping facilities. Manufacturing outgrew the Adams location and can now be accomplished at the PWT subsidiary in McKinney Texas, a contractual assembly location in south Los Angeles, and at the Company’s China subsidiary.

 

On October 7, 2016, OriginClear participated in the official launch of the La Kretz Innovation Campus, presided over by the Mayor of the City of Los Angeles, Mayor Eric Garcetti.

 

On June 6, 2016, OriginClear announced that the Financial Industry Regulatory Authority (FINRA) had approved a change of the company’s stock ticker symbol to “OCLN”.

 

Our Strategy

 

The Group

 

The OriginClear Group’s strategy is to grow incrementally by focusing on the $500 billion water treatment market, acquiring the hands-on service suppliers in this market. It intends to develop a network of these wholly-owned water treatment companies to meet the needs of end users from all industries with a full range of treatment technologies. Due to increased regulation, water treatment recycling challenges and a need to focus on their own core business, many water users today are outsourcing their water treatment needs to outside experts. In addition, we have identified a major trend in decentralization of water treatment, which we believe will cause small water service companies to grow. There will be significant synergies within the Group as technology, manufacturing expertise, market knowledge, projects and opportunities are shared. The target acquisitions must be accretive in nature with solid sales growth and profitability. The acquired companies must have a solid management team to accelerate their previous growth with excellent customer service. Initially, the acquisition focus is in the U.S. but will be expanded internationally in a few years.

 

Technology Licensing

 

We are licensors of our technology. We grant non-exclusive licenses to OEMs (Original Equipment Manufacturers), and participate in joint ventures, contributing our technology and our commitment to each joint venture’s business focus. We have also begun to grant Master Licenses, beginning with our wholly-owned subsidiary in Hong Kong.

 

Technology Applications

 

The Algae Industry

 

Much of the petroleum that powers our world comes from ancient algae that decomposed hundreds of millions of years ago. Like petroleum, algae can be turned into transportation fuels, chemicals, pharmaceuticals and plastics; but unlike petroleum, algae is a food as well; and absorbs CO2 in the growth process, about two tons of CO2 for every ton of algae produced. Algae is one of nature′s most efficient and versatile photosynthetic factories. It has a short growing cycle and does not require arable land or fresh water, which makes it very attractive as an energy feedstock, or as a healthy and natural feed or fertilizer. But a major barrier to commercialization is the difficulty in extracting small amounts of algae biomass from very large quantities of water at a reasonable cost and without using more energy than can be created. And the quantities of water required can be very large indeed: algae-to-water ratio can be as high as 1-to-1000. Conventional water separation technologies such as centrifuges and membranes may work on a limited basis, but can be too expensive for large-scale use. Additionally, centrifuges are typically a batch process.

 

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Early Harvesting Technology: Single Step Extraction™

        

OriginClear’s early algae harvesting technology was Single Step Extraction™ (SSE). Today, SSE is the first stage in EWS and it powers our sanitation and growth optimizing applications.

 

Algae For Feed

 

In 2013, OriginClear developed demonstration systems for the aquaculture industry and showed these at a public event on December 18, 2013 at Aqua Farming Tech, a working fish farm in Thermal, California. Aqua Farming Tech remains a testing site for OriginClear’s aquaculture activities. In 2014, OriginClear assigned its aquaculture initiative to the algae division to focus on the growing opportunities in the Algae For Feed marketplace. In April 2014, OriginClear announced that it had agreed to a collaborative exchange of equipment and information with the Catalina Sea Ranch, the first offshore shellfish ranch in U.S. Federal waters. OriginClear provided a demonstration-scale Model 12 system to Catalina Sea Ranch, which has used it to treat incoming seawater and harvest algae to feed its shellfish nursery and selective breeding program. Catalina Sea Ranch provides independent data on the efficiency and use of the machine, and gives OriginClear access to its nursery for field research. OriginClear aims to continue to support the growing algae industry in the fast-growing animal and fish feed sector.

 

Algae For Soil Enrichment

 

In 2015, OriginClear began developing the use of algae for soil enrichment with partner AlgEternal. Based on AlgEternal’s field tests, it believes that its pure algae concentrate, harvested with OriginClear technology, may reduce conventional fertilizer cost by up to 40 percent.

 

In 2016, the FREEWATERBOX® developed by OriginClear joint venture Ennesys completed a field pilot in Dubai. It is based on the use of micro-algae for the removal or biotransformation of pollutants, including nutrients and xenobiotics from wastewater and CO2 from waste air, while producing a soil conditioner for the enhancement and protection of agricultural crops.

 

The Oil and Gas Industry

 

The oil and gas industry is one of the most water-intensive industries in the world. It is both a large consumer of fresh water and producer of contaminated water, which is also a potential asset for drought-affected regions. Water is produced and used in large quantities in oil and gas operations. According to the U.S. Department of Energy, an average of 3 barrels of contaminated water is generated for each 1 barrel of oil produced. In the United States, the average is 7 barrels of water. Greentech Media reports that energy companies pay between $3 to $12 to dispose of each barrel of produced water. We believe OriginClear’s high speed, low energy and primarily chemical-free Electro Water Separation™ technology is ideally suited to help clean up the large quantities of water used in oil and gas operations. A 2009 report on modern shale gas by the Groundwater Protection Council, "Modern Shale Gas Development in the United States: A Primer," stated that “the amount of water needed to drill and fracture a horizontal shale gas well generally ranges from about 2 million to 4 million gallons, depending on the basin and formation characteristics.” While fracking technology promises to unleash an abundant supply of inexpensive natural gas to power the modern world, water is quickly becoming a serious limiting factor. Additionally, the water returns as “frack flowback” laced with petroleum and contaminants that require rapid and efficient removal for disposal and recycling.

        

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Oil and Gas Water Cleanup Solutions

 

The Company has completed successful trials in the Niobrara gas fields of Colorado, the Permian light crude oil fields of West Texas and the Monterey heavy crude oil fields in California. The Bakersfield testing was particularly interesting because it demonstrated that produced water from heavy oil in California’s Monterey Shale Formation could technically and economically be reprocessed for Cyclic Steam Stimulation in oil wells and agricultural irrigation water. EWS removes up to 99.9% of all free and emulsified oil, and 99.5% of suspended solids from oil & gas wastewater, while also removing certain dissolved contaminants that will co-precipitate, and continuously disinfecting bacteria. In the oil and gas application, OriginClear’s core EWS technology is typically supplemented with ‘heavies’ removal on the front end, intelligent controls, and a final polishing system, for a complete solution.

 

 

 

All systems can include a common SCADA control system with touch screen which will allow automatic control of the process as well as remote monitoring and alarms. Through its licensees and joint venture partners, OriginClear is making EWS available to customers such as: E&P operators, service companies, disposal well operators and water treatment companies.

 

Downstream Integration

 

While OriginClear’s EWS is designed to deliver essentially “clear” water, additional processing is often needed to meet the requirements of specific applications. In such cases, OriginClear works with the manufacturers of downstream solutions, such as TriSep, Dow Chemical or their OEMs, and other manufacturers, to integrate processes such as Ultra- or Nano-Membrane Filtration, to achieve, for example, flowback water treatment to a standard acceptable for “new” frack water. This complete water treatment solution is available through OriginClear’s licensees and joint venture partners.

 

Industrial and agricultural Waste Water

 

Perhaps the largest of all opportunities for EWS is in cleaning up industrial, agricultural and urban effluents. EWS is an electrically-based technology that can target any application in waste water treatment, with a focus on the “clarity” stage of removing oils, suspended solids and bacteria. EWS technology has been shown to effectively clean organics such as petroleum, achieving up to 99.9% reduction in free oil and a 99.5% reduction in suspended solids, and reduction of up to 99% of bacteria and other invaders, for clean and sanitized effluents. Another EWS prototype has been demonstrated in China for landfill leachate treatment. EWS alone achieved a 75% reduction in leachate’s Chemical Oxygen Demand, a marker of contamination level that includes suspended solids and dissolved contamination as well, and 70% reduction in Ammonia.

 

The Advanced Oxidation complement to EWS. Known as EWS:AOx™, announced in March of 2016, shows promise to neutralize micro-contaminants such as ammonia, hydrogen sulfide, and dioxane, an industrial solvent which has been found extensively in aquifers in Southern California and elsewhere. We also believe that EWS:AOx can be valuable in neutralizing many other anthropogenic organic compounds (AOCs), including endocrine disrupting chemicals (EDCs). Further testing, with the assistance of a regional water district, is underway at our headquarters in the Los Angeles Cleantech Incubator (LACI).

 

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Competitors

 

The Algae Industry

        

Companies in the new algae fuels industry tend to organize themselves as integrated producers and to keep their intellectual property to themselves. Our strategy, on the other hand, is to share our technology widely through licensing and private labeling. With respect to our algae harvesting and sanitizing applications, we are aware that Alfa Laval, Algix, Aurora Algae, Cavitation Technologies, Evodos, New Oil Resources, Open Algae LLC, Perlemax, Valicor, Smartflow Technologies, Westfalia and World Water Works, among others, offer competing technologies. OriginClear believes there is synergy between its process and many of these competing technologies, where EWS can do the “heavy lifting” as the first, high-speed concentration stage, with other processes offering further concentration.

 

The Oil and Gas Industry

 

Market and Trends

 

The oil and gas industry is a major source of waste water. In the US, it generates about seven barrels of produced water for each barrel of oil. More recently the flowback water from fracking operations is a short term, but intensive, source of waste water as well. Historically the solution to the treatment of produced and frack flowback water has primarily been to dispose it in permitted injection wells. Many technologies have existed for the “filtering” of these waters prior to injection, but with limited ability to remove contaminants. More recently, because of the cost of water management, environmental concerns and regulatory requirements, these “filtering” technologies are being reviewed and new technologies are being developed; the goal being to reduce water management costs and to dramatically reduce the volume of disposal. Not only can the oil and gas industry look forward to reduced water management costs, but environmental impacts will have been reduced; a win-win for all concerned. Accordingly, the industry is increasingly recycling its produced and frack flowback waters for use in water flooding, cyclic steam stimulation, enhanced oil recovery, new hydraulic fracturing operations, irrigation and even drinking water. Recycling is becoming the economic choice as technologies have advanced and the cost of water treatment has decreased; while at the same time, the cost of disposal has risen (according to Shale Play Water Management magazine, costing between $1.75 and $26.75 per barrel of water). In addition, intense lobbying by environmental groups in front-line regions like California and New York is driving treatment and reuse as a way to make fracking and drilling in general more acceptable, especially in the midst of California’s historic drought. Markets-and-markets reports that the global produced water treatment market size is estimated to exceed $8 billion by 2019. The major factors responsible driving the growth of this market include the energy sector growth in Africa and the Middle East, along with increasing strictness of environmental policies. According to Bluefield Research, wastewater treatment spending for hydraulic fracturing is expected to grow almost three-fold, from $138 million in 2014 to $357 million in 2020 in the U.S. Bluefield cites water supplies increasingly at risk, tighter regulations emerging in key states, and costs of disposal on the rise as factors contributing to the substantial rise in water treatment and reuse, which is expected to account for 27 percent of total produced and flowback water by 2020, about double current levels.

 

Competing Technologies

 

These “filtering” technologies range from simple decanting to distillation. They are typically implemented as a multi-stage process to attain water quality standards for the planned reuse. EWS can act as a pre-treatment stage for any of these multi-stage processes. While EWS can remove the emulsified and free oil, suspended solids and bacteria from the water stream, these subsequent stages can remove the heavy metals, scaling chemicals, salts and other natural and introduced chemicals. EWS can reduce fouling of these filters and membranes, making subsequent or downstream processes complementary to EWS and creating a strategic opportunity to collaborate. Direct competitors using some form of electro-coagulation technologies include: Halliburton, Watertectonics, Bosque, Ecolotron, Quantum-ionics, Kaselco, Baker Hughes, RecylClean, Axine Water and Ecosphere. Other companies also compete with EWS, but use other technologies that can involve chemical coagulants, batch operation or a high level of consumables. These include: Aqua-Tech, Aqua-Pure, CTI, Purifics, HydroZonics, Myclex, Osmonics, Filterboxx, MECO, Layne, 212 Resources, Veolia, Fountain Quail, Pall and Altela.

 

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The Waste Industry

 

Waste water is a growing problem as industry, agriculture and communities expand, droughts force the need for reclamation, and aquifers and reservoirs become polluted. Meanwhile, previously lightly-regulated regions of the world are enforcing much stricter environmental regulations. Overall, water security is one of the greatest challenges of our time. According to analysts at McKinsey & Company (Charting our Water Future, November 2009 report), the world will see a 40 percent gap between water supply and demand by 2030. Industrial uses account for a startling amount of water consumed around the world. According to the United Nations (The World Business Council for Sustainable Development, March 2006 report) industry consumes nearly 60 percent of available water in high-income countries. Curbing fresh water consumption at the industrial level has the potential to significantly improve water security worldwide. In general, we believe that OriginClear has one or more advantages over some of the potential competitors, in that our process does not primarily use chemicals, is highly scalable on a continuous flow process, and may be significantly lower in energy consumption. We believe our technology may, in some cases, complement these companies’ offerings, however there is no guarantee that our technology will produce more efficiently or cost-effectively than these other technologies. To our knowledge, there is no company or technology available on the market providing a similar level of synergistic integration of the three processes that we implement under a single configuration: Electro Coagulation, Electro Flotation (these two being combined in our process as EWS) and Advanced Oxidation (AOx).

 

Taken separately, these processes are marketed as follows:

 

Electro Coagulation, though being a relatively new technology, has been known and available in the market for approximately 30 years. Companies like Watertectonics, Kaselco, Powel Water or H2O Technologies offer engineered electrocoagulation systems to the market. There are also a number of one-off electrocoagulation systems in operation worldwide. Electro Flotation is an emerging technology that is mostly seen in scientific publications, as an alternative to more conventional Dissolved Air Flotation (DAF) systems. DAF systems are available worldwide from numerous suppliers including but not limited to, Veolia Water, Ecologix, RWL Water, SAWater, WPL International, World Water Works, etc. and almost exclusively rely on massive injection of chemical coagulants for their efficiency. EWS has been designed with versatility in mind. It is equally efficient when used with sacrificial anodes, slowly releasing the anode’s metal ions that will provide the coagulation effect, or with Dynamically Stable Anodes (DSA) that will have a catalytic role on water matrix preparation with or without chemical coagulants. In both cases, the patented reactors design marks a significant evolution in the industry, featuring an enhanced mixing function, a better mass transfer and an easier maintenance and replacement when using sacrificial anodes.

 

Advanced Oxidation, not unlike Electro Coagulation, has been known to scientists for approximately 40 years. However, the few Advanced Oxidation technologies being commercially in use mostly rely on catalyst injection and/or on a combination of catalysts and UV irradiation for their process. They are not as streamlined as EWS:AOx, which is solely an electrochemical process, and these processes require extensive preparation of the water matrix to be efficient. MIOX, Blue Earth Labs are marketing similar systems for niche applications, without offering the additional suspended solids removal functions featured by EWS. Other identified competitors are Lenntech, SSWM, Esco International, and Spartan Water Treatment. Here again, OriginClear’s reactors’ specific design is a major evolution. Contact area, mass transfer, high turbulence caused by shear stress all help in enhancing oxidation reactions and, furthermore, the two variations of the tubular reactor design respectively have a major role in direct oxidation, mostly targeting “Hard COD”, contaminants that are known for being difficult to degrade, and, additionally, indirect oxidation, widely used for less difficult reactions.

 

In summary, while competitors exist for each of the three phases of our technology, we have not detected any that does all three in one synergistic system.

 

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Government and Environmental Regulation

        

We are not aware of any existing or probable government regulations that would negatively impact on our operations. As a licensor and/or provider of water treatment equipment, we are not subject to government regulations for the removal of oils, solids and pathogens from water, other than normal safety standards and certifications (such as UL or CE) for goods that we manufacture for demonstrations and joint ventures, and our product lines. However, our prospective customers are subject to local, state and federal laws and regulations governing environmental quality and pollution control. To date, our compliance with government regulations has had no material effect on our operations, capital, earnings, or competitive position, and the cost of such compliance has not been material. We are unable to assess or predict at this time what effect additional regulations or legislation could have on our activities.

 

Intellectual Property

 

Our business is also based on developing a strong intellectual property portfolio and establishing a network of OEM distributors and core technology licensees.  We have filed the following patent and trademark applications: 

 

On July 28, 2007, we filed a utility patent application with the USPTO to protect the intellectual property rights for “Algae Growth System for Oil Production”. The inventors listed on the patent application are Nicholas Eckelberry and Riggs Eckelberry, our founders. We are listed as the assignee. On January 29, 2009 the application published with the publication number US 2009-0029445 A1.

 

On May 23, 2008, we filed a utility patent application with the USPTO to protect the intellectual property rights for “Apparatus And Method For Optimizing Photosynthetic Growth In a Photo Bioreactor”. The inventors listed on the patent application are Steven Shigematsu and Nicholas Eckelberry. We are listed as the assignee. On November 26, 2009 the application published with the publication number US 2009-0291485 A1.

 

On July 26, 2009, we filed a provisional patent application with the USPTO to protect the intellectual property rights for “Procedure For Extraction Of Lipids From Algae Without Cell Sacrifice”. The inventors listed on the patent application are Paul Reep and Michael Green. We are listed as the assignee. This application was re-filed as a provisional application on August 13, 2010.

 

On April 20, 2010, we filed a PCT application with the USPTO to protect the intellectual property rights for “Systems, Apparatus and Methods for Obtaining Intracellular Products and Cellular Mass and Debris from Algae and Derivative Products and Process Use Thereof”. The inventors are Nicholas Eckelberry, Michael Green, and Scott Fraser. We are listed as the assignee. On October 10, 2010 the application published with the publication number WO/2010/123903.

 

On June 18, 2010, we filed a provisional patent application with the USPTO to protect the intellectual property rights for “Bio-Energy Reactor”. The inventors listed on the patent application are Michael Green, and Nicholas Eckelberry. On December 22, 2011, the application was published with the publication number US 2011-0308962 A1. We are listed as the assignee.

 

On October 17, 2010, we filed a provisional patent application with the USPTO to protect the intellectual property rights for “Methods and Apparatus for Dewatering, Flocculation and Harvesting of Algae Cells”. The inventors listed on the patent application are Michael Green, Nicholas Eckelberry, Scott Fraser and Brian Goodall. We are listed as the assignee. On May 24, 2012, the application was published with the publication number US 2012-0129244 A1. The application was converted to a utility application on October 14, 2011.

 

On October 19, 2010, we filed a provisional patent application with the USPTO to protect the intellectual property rights for “Methods and Apparatus for Dewatering, Flocculation and Harvesting Algae Cells”. The inventors listed on the patent application are Michael Green, Nicholas Eckelberry, Scott Fraser, and Brian Goodall. We are listed as the assignee. The application was converted to a utility application on October 18, 2011. On April 28, 2011, the application was published with the publication number US 2011-0095225 A1.

 

On October 19, 2010, we filed a PCT application with the Korean Receiving Office to protect the intellectual property rights for “Systems and Methods for Extracting Non-Polar Lipids from an Aqueous Algae Slurry and Lipids Produced There from”. The inventors are Nicholas Eckelberry, Michael Green, and Scott Fraser. We are listed as the assignee. On April 28, 2011, the application published with the publication number WO/2011/133181.

 

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On March 18, 2011, we filed a provisional patent application with the USPTO to protect the intellectual property rights for “Enhancing Algae Growth by Reducing Competing Microorganisms in a Growth Medium”. The inventors listed on the patent application are Michael Green, Scott Fraser, Nicholas Eckelberry, and Jose Sanchez Pina. We are listed as the assignee.

 

On May 20, 2011, we filed a provisional patent application with the USPTO to protect the intellectual property rights for “Systems and Methods for Monitoring and Controlling Process Chemistry Associated with Biomass Growth, Oil Product and Oil Separation in Aqueous Mediums”. The inventors listed on the patent application are Paul Reep and Gavin Grey. We are listed as the assignee.

 

On June 16, 2011, we filed a utility patent application with the USPTO to protect the intellectual property rights for “Bio-Energy Reactor”. The inventors listed on the patent application are Michael Green and Nicholas Eckelberry. On April 28, 2011 the application published with the publication number US 2011-0095225 A1. We are listed as the assignee.

 

On August 10, 2011, we filed a utility patent application with the USPTO to protect the intellectual property rights for “Procedure for Extracting of Lipids from Algae without Cell Sacrifice”. The inventors listed on the patent application are Michael Green and Paul Reep. We are listed as the assignee.

 

On August 12, 2011, we filed a PCT application with the Korean Receiving Office to protect the intellectual property rights for “Procedure for Extracting of Lipids from Algae Without Cell Sacrifice”. The inventors listed on the patent application are Michael Green and Paul Reep. On February 16, 2012 the application published with the publication number WO/2012/021831. We are listed as the assignee.

 

On September 7, 2011, we filed a provisional patent application with the USPTO to protect the intellectual property rights for “Apparatuses, Systems and Methods for Increasing Contact Between Solutes and Solvents in an Aqueous Medium”. The inventors listed on the patent application are Nicholas Eckelberry, Gavin Gray, Jose L Sanchez Pina and Maxwell Roth. We are listed as the assignee.

 

On October 10, 2011, we filed a provisional patent application with the USPTO to protect the intellectual property rights for “Systems and Methods For Increasing Growth Of Biomass Feedstocks”. The inventors listed on the patent application are Nicholas Eckelberry, Jose L Sanchez Pina and Michael Green. We are listed as the assignee.

 

On October 14, 2011, we filed a provisional patent application with the USPTO to protect the intellectual property rights for “Systems and Methods For Developing Terrestrial and Algal Biomass Feedstocks and Bio-Refining the Same”. The inventor listed on the patent application was Paul Reep. We are listed as the assignee.

 

On October 14, 2011, we filed a utility patent application with the USPTO to protect the intellectual property rights for “Systems, Methods And Apparatuses For Dewatering, Flocculating And Harvesting Algae Cells”. The inventors listed on the patent application are Michael Green, Scott Frasier, Brian Goodall and Nickolas Eckelberry.  On May 24, 2012 the application published with the publication number US 2012/0129244 A1. We are listed as the assignee.

 

On October 18, 2011, we filed a PCT application with the Korean Receiving Office to protect the intellectual property rights for “Systems, Methods and Apparatuses For Dewatering, Flocculating and Harvesting Algae Cells”. The inventors listed on the patent application are Michael Green, Scott Frasier, Brian Goodall and Nickolas Eckelberry.  On April 26, 2012 the application published with the publication number WO/2012/054404. We are listed as the assignee.

 

On November 11, 2011, we filed a trademark application with the USPTO to protect the intellectual property rights for our company logo “O”. On February 11, 2013 the trademark was issued with Certificate Number 4,284,801.

 

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On November 11, 2011, we filed a trademark application with the USPTO to protect the intellectual property rights for our company logo “OriginOil”. On February 11, 2013 the trademark was issued with Certificate Number 4,284,800.

 

On January 30, 2012, we filed a provisional patent application with the USPTO to protect the intellectual property rights for “Systems and Methods for Harvesting and Dewatering Algae”. The inventor listed on the patent application is Nicholas Eckelberry. We are listed as the assignee.

 

On March 12, 2012, we filed a utility patent application and PCT applications with the Korean Receiving Office to protect the intellectual property rights for “Enhancing Algae Growth by Reducing Competing Microorganisms in a Growth Medium”. The inventors listed on the patent application are Michael Green, Scott Fraser, Nicholas Eckelberry, and Jose Sanchez Pina. We are listed as the assignee. On November 27, 2012, the application published with the publication number WO/2012/129031.

 

On April 17, 2012, we filed a provisional patent application with the USPTO to protect the intellectual property rights for “Solute Extraction From an Aqueous Medium Using a Modular Device”. The inventor listed on the patent application is Nicholas Eckelberry. We are listed as the assignee.

 

On May 18, 2012, we filed a provisional patent application with the USPTO to protect the intellectual property rights for “Modular Systems and Methods for Extracting a Contaminant from a Solution”. The inventor listed on the patent application is Nicholas Eckelberry. We are listed as the assignee.

 

On May 18, 2012, we filed a utility patent application with the USPTO to protect the intellectual property rights for “Monitoring Systems for Biomass Processing Systems”. The inventors listed on the patent application are Paul Reep and Gavin Grey. We are listed as the assignee.

 

On May 21, 2012, we filed a PCT application with the Korean Receiving Office to protect the intellectual property rights for “Monitoring Systems for Biomass Processing Systems”. The inventors listed on the patent application are Paul Reep and Gavin Grey. We are listed as the assignee.

 

On September 6, 2012, the Australian Patent Office issued patent 2010239380 titled “Systems, Apparatus and Methods for Obtaining Intracellular Products and Cellular Mass and Debris from Algae and Derivative Products and Process of Use Thereof”. This application was nationalized from PCT application PCT/US2010/031756.

 

On September 7, 2012, we filed a utility patent application with the USPTO to protect the intellectual property rights for “Increasing Contact Between Solutes and Solvents in an Aqueous Medium”. The inventors listed on the patent application are Nicholas Eckelberry, Gavin Grey, Jose Sanchez Pina, and Maxwell Roth. We are listed as the assignee.

 

On September 9, 2012, we filed a utility patent application with the USPTO to protect the intellectual property rights for “Systems and Methods for Increasing Growth of Biomass Feedstocks”. The inventors listed on the patent application are Nicholas Eckelberry, Mike Green, and Jose Sanchez Pina. We are listed as the assignee.

 

On October 10, 2012, we filed a PCT application with the Korean Receiving Office to protect the intellectual property rights for “Systems and Methods for Increasing Growth of Biomass Feedstocks”. The inventors listed on the patent application are Nicholas Eckelberry, Mike Green, and Jose Sanchez Pina.  We are listed as the assignee.

 

On October 15, 2012, we filed a utility patent application with the USPTO to protect the intellectual property rights for “Systems and methods for Developing Terrestrial and Algal Biomass Feedstocks and Bio-refining the Same”. The inventor listed on the patent application is Paul Reep. We are listed as the assignee.

 

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On October 18, 2012, we filed a utility patent application with the USPTO to protect the intellectual property rights for “Systems and methods for Extracting Non-polar Lipids from an Aqueous Algae Slurry and Lipids Produced There from”. The inventors listed on the patent application are Nicholas Eckelberry, Michael Green and Scott Fraser. We are listed as the assignee.

 

On October 19, 2012, we filed national stage application with the EPO to protect the intellectual property rights for “Systems and methods for Extracting Non-polar Lipids from an Aqueous Algae Slurry and Lipids Produced There from”. The inventors listed on the patent application are Nicholas Eckelberry, Michael Green and Scott Fraser. We are listed as the assignee.
   
On January 29, 2013, we filed a utility patent application with the USPTO to protect the intellectual property rights for “Systems and Methods for Harvesting and Dewatering Algae”. The inventor listed on the patent application is Nicholas Eckelberry. We are listed as the assignee.

 

On January 30, 2013, we filed a PCT application with the Korean Receiving Office to protect the intellectual property rights for “Systems and Methods for Harvesting and Dewatering Algae”. The inventor listed on the patent application is Nicholas Eckelberry. We are listed as the assignee.

 

On April 17, 2013, we filed a patent application with the USPTO to protect the intellectual property rights for “Harvesting and Dewatering Algae Using a Two-Stage Process”. The inventors listed on the patent application are Nicholas Eckelberry and Jose L. Sanchez Pina. We are listed as the assignee.

 

On April 17, 2013, we filed a PCT application with the USPTO to protect the intellectual property rights for “Harvesting and Dewatering Algae Using a Two-Stage Process”. The inventors listed on the patent application are Nicholas Eckelberry and Jose L. Sanchez Pina. We are listed as the assignee.

 

On April 26, 2013, we filed a patent application with the USPTO to protect the intellectual property rights for “Producing Algae Biomass Having Reduced Concentration of Contaminants”. The inventor listed on the patent application is Jose L. Sanchez Pina. We are listed as the assignee.

 

On July 15, 2013, we filed a patent application with the USPTO to protect the intellectual property rights for “Removing Ammonia from Water”. The inventors listed on the patent application are Nicholas Eckelberry, Jose L. Sanchez Pina and Andrew Davies. We are listed as the assignee.

 

On September 9, 2013, we filed a patent application with the EPO, to protect the intellectual property rights for “Removing Compounds from Water Using a Series of Reactor Tubes Containing Cathodes Comprised of a Mixed Metal Oxide”. The inventors listed on the patent application are Nicholas Eckelberry, Jose L. Sanchez Pina and Scott Alexander Fraser. We are listed as the assignee.

 

On December 17, 2013, we filed a patent application with the USPTO to protect the intellectual property rights for “Removing Compounds from Water Using a Series of Reactor Tubes Containing Cathodes Comprised of a Mixed Metal Oxide”. The inventors listed on the patent application are Nicholas Eckelberry, and Jose L. Sanchez Pina. We are listed as the assignee.
   
On February 27, 2014, we filed a patent application with the USPTO to protect the intellectual property rights for “Electro Catalytic Process for Coalescing and Skimming Pollutants in Bodies of Water Prior to Filtration”. The inventor listed on the patent application is Nicholas Eckelberry. We are listed as the assignee.
   

On April 17, 2014, we filed a PCT application with the USPTO to protect the intellectual property rights for “Removing Ammonia from Water”. The inventors listed on the patent application are Nicholas Eckelberry, Jose L. Sanchez Pina and Andrew Davies. We are listed as the assignee

   
On April 17, 2014, we filed a PCT application with the USPTO, to protect the intellectual property rights for “Removing Compounds from Water Using a Series of Reactor Tubes Containing Cathodes Comprised of a Mixed Metal Oxide”. The inventors listed on the patent application are Nicholas Eckelberry and Jose L. Sanchez Pina. We are listed as the assignee.

 

 

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On April 17, 2014, we filed a PCT application with the USPTO to protect the intellectual property rights for “Producing Algae Biomass Having Reduced Concentration of Contaminants”. The inventors listed on the patent application are Nicholas Eckelberry and Jose L. Sanchez Pina. We are listed as the assignee.
   
On June 24, 2014, we filed a patent application with the Australian Patent Office to protect the intellectual property rights for “Systems and Methods for Harvesting and Dewatering Algae”. The inventor listed on the patent application is Nicholas Eckelberry. We are listed as the assignee.
   
On June 24, 2014, we filed a patent application with the European Patent Office to protect the intellectual property rights for “Systems and Methods for Harvesting and Dewatering Algae”. The inventor listed on the patent application is Nicholas Eckelberry. We are listed as the assignee.

 

On July 23, 2014, we filed a patent application with the Chinese Patent Office to protect the intellectual property rights for “Systems and Methods for Harvesting and Dewatering Algae”. The inventor listed on the patent application is Nicholas Eckelberry. We are listed as the assignee.
   
On July 25, 2014, we filed a patent application with the Korean Patent Office to protect the intellectual property rights for “Systems and Methods for Harvesting and Dewatering Algae”. The inventor listed on the patent application is Nicholas Eckelberry. We are listed as the assignee.
   
On July 28, 2014, we filed a patent application with the Japanese Patent Office to protect the intellectual property rights for “Systems and Methods for Harvesting and Dewatering Algae”. The inventor listed on the patent application is Nicholas Eckelberry. We are listed as the assignee.
   

On October 13, 2014, we filed a patent application with the EPO to protect the intellectual property rights for “Harvesting and Dewatering Algae Using a Two-Stage Process”. The inventor listed on the patent application is Nicholas Eckelberry. We are listed as the assignee.

 

On October 15, 2014, we filed a patent application with the Malaysian Patent Office to protect the intellectual property rights for “Harvesting and Dewatering Algae Using a Two-Stage Process”. The inventor listed on the patent application is Nicholas Eckelberry. We are listed as the assignee.
   
On October 16, 2014, we filed a patent application with the Japanese Patent Office to protect the intellectual property rights for “Harvesting and Dewatering Algae Using a Two-Stage Process”. The inventor listed on the patent application is Nicholas Eckelberry. We are listed as the assignee.
   
On October 16, 2014, we filed a patent application with the Indian Patent Office to protect the intellectual property rights for “Harvesting and Dewatering Algae Using a Two-Stage Process”. The inventor listed on the patent application is Nicholas Eckelberry. We are listed as the assignee.
   
On October 17, 2014, we filed a patent application with the Mexican Patent Office to protect the intellectual property rights for “Harvesting and Dewatering Algae Using a Two-Stage Process”. The inventor listed on the patent application is Nicholas Eckelberry. We are listed as the assignee.
   
On October 17, 2014, we filed a patent application with the Chinese Patent Office to protect the intellectual property rights for “Harvesting and Dewatering Algae Using a Two-Stage Process”. The inventor listed on the patent application is Nicholas Eckelberry. We are listed as the assignee.
   
On November 12, 2014, we filed a patent application with the Korean Patent Office to protect the intellectual property rights for “Harvesting and Dewatering Algae Using a Two-Stage Process”. The inventor listed on the patent application is Nicholas Eckelberry. We are listed as the assignee.
   
On November 17, 2014, we filed a utility patent application with the USPTO to protect the intellectual property rights for “System for removal of suspended solids and disinfection of water”. The inventors listed on the patent application are William Charneski, Nicholas Eckelberry and Dave Anderson. We are listed as the assignee.

 

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On December 11, 2014, we filed a utility patent application with the USPTO to protect the intellectual property rights for “Method for Treating Wastewater”. The inventors listed on the patent application are Nicholas Eckelberry and Andrew Davies. We are listed as the assignee.
   
On December 10, 2014, the Chinese Patent Office issued patent ZL201080023861.1 titled “Systems, Apparatus and Method for Obtaining Intracellular Products and Cellular Mass and Debris from Algae and Derivative Products and Process of Use Thereof”.
   
On December 16, 2014, we filed a CIP application with the USPTO to protect the intellectual property rights for “Systems and Methods for Treating Wastewater”. The inventors listed on the patent application are Nicholas Eckelberry, William Charneski and Andrew Davies. We are listed as the assignee.

 

On February 26, 2015, we filed a Utility Patent application with the USPTO to protect the intellectual property rights for “Electro Catalytic Process for Coalescing and Skimming Pollutants in Bodies of Water Prior to Filtration”. The inventor listed on the patent application is Nicholas Eckelberry. This application was published under the publication number US-20150191366-A1.

 

On February 27, 2015, we filed a PCT application to protect our international priority rights on intellectual property for “Electro Catalytic Process for Coalescing and Skimming Pollutants in Bodies of Water Prior to Filtration”. The inventor listed on the patent application is Nicholas Eckelberry. The publication number is WO 2015-131111.

 

On June 5, 2015, we filed a provisional patent application with the USPTO to protect the intellectual property rights for “Systems and Methods for Base and Acid Reaction for Extraction”. The inventor listed on the patent application is Nicholas Eckelberry. We are listed as the assignee.

 

On July 8, 2015, we filed a CIP application with the USPTO to protect the intellectual property rights for “Systems and methods for Extracting Non-polar Lipids from an Aqueous Algae Slurry and Lipids Produced Therefrom”. The inventors listed on the patent application are Nicholas Eckelberry, Michael Green and Scott Fraser. We are listed as the assignee.

 

On October 15, 2015, we filed a patent application with the Malaysian patent office to protect the intellectual property rights for “Producing Algae Biomass Having Reduced Concentration of Contaminants”. The inventors listed on the patent application are Nicholas Eckelberry and Jose L. Sanchez Pina. We are listed as the assignee.

 

On October 16, 2015, we filed a patent application with the Japanese patent office to protect the intellectual property rights for “Producing Algae Biomass Having Reduced Concentration of Contaminants”. The inventors listed on the patent application are Nicholas Eckelberry and Jose L. Sanchez Pina. We are listed as the assignee.

 

On October 19, 2015, we filed a patent application with the Chinese patent office to protect the intellectual property rights for “Producing Algae Biomass Having Reduced Concentration of Contaminants”. The inventors listed on the patent application are Nicholas Eckelberry and Jose L. Sanchez Pina. We are listed as the assignee.

 

On October 20, 2015, we filed a patent application with the EPO to protect the intellectual property rights for “Producing Algae Biomass Having Reduced Concentration of Contaminants”. The inventors listed on the patent application are Nicholas Eckelberry and Jose L. Sanchez Pina. We are listed as the assignee.

 

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On October 20, 2015, we filed a patent application with the Australian patent office to protect the intellectual property rights for “Harvesting and Dewatering Algae Using a Two-Stage Process”. The inventors listed on the patent application are Nicholas Eckelberry and Jose L. Sanchez Pina. We are listed as the assignee.

 

On November 12, 2015, we filed a patent application with the Korean patent office to protect the intellectual property rights for “Producing Algae Biomass Having Reduced Concentration of Contaminants”. The inventors listed on the patent application are Nicholas Eckelberry and Jose L. Sanchez Pina. We are listed as the assignee.

 

On November 13, 2015, we filed a patent application with the Indonesian patent office to protect the intellectual property rights for “Producing Algae Biomass Having Reduced Concentration of Contaminants”. The inventors listed on the patent application are Nicholas Eckelberry and Jose L. Sanchez Pina. We are listed as the assignee.

 

On November 17, 2015, we filed a PCT application to protect our international priority rights on the intellectual property for “Systems for Removal of Suspended Solids and Disinfection of Water”. The inventors listed on the patent application are Nicholas Eckelberry, William Charneski and Dave Anderson. We are listed as the assignee.

 

On November 17, 2015, we filed a patent application with the Indian patent office to protect the intellectual property rights for “Producing Algae Biomass Having Reduced Concentration of Contaminants”. The inventors listed on the patent application are Nicholas Eckelberry and Jose L. Sanchez Pina. We are listed as the assignee.

 

On December 10, 2015, we filed a PCT application to protect our international priority rights on the intellectual property for “Systems and Methods for Treating Wastewater”. The inventors listed on the patent application are Nicholas Eckelberry, William Charneski and Andrew Davies. We are listed as the assignee.

 

On January 5, 2016, we filed a provisional patent application with the USPTO to protect our intellectual property rights for “Systems and methods for reduction of total organic compounds in wastewater”. The inventor listed on the patent application is Nicholas Eckelberry. We are listed as the assignee.

 

On March 10, 2016, we filed a patent application with the Hong Kong patent office to protect our intellectual property rights for “Producing Algae Biomass and Decontaminating Wastewater Utilizing a Series of Reactor Tubes with Mixed Metal Oxide Electrodes”. The inventors listed on the patent application are Nicholas Eckelberry and Jose Luis Sanchez Pina. We are listed as the assignee.

 

On May 13, 2016, the Japanese Patent Office issued patent No. 5931220 titled “Systems and Methods for Harvesting and Dewatering Algae”. This application was nationalized from PCT application WO/2013/116357.

 

On June 2, 2016, we filed a Utility Patent application with the USPTO to protect our intellectual property rights for “Systems and methods for reduction of total organic compounds in wastewater”. The inventor listed on the patent application is Nicholas Eckelberry. We are listed as the assignee.

 

On June 3, 2016, we filed a PCT application to protect our international priority rights on the intellectual property for “Systems and methods for reduction of total organic compounds in wastewater”. The inventor listed on the patent application is Nicholas Eckelberry. We are listed as the assignee.

 

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In 2008, we abandoned the pursuit of two provisional patent filings filed in relating to “In-Line Lysing And Extraction System for Microorganisms” and “Renewable Carbon Sequestering Method of Producing Pollution Free Electricity”. 

 

In 2009, we abandoned the pursuit of a provisional patent related to “Modular Portable Photobioreactor System”.

 

In 2010, we abandoned the pursuit of utility patent application related to “Device and Method for Separation, Cell Lysing and Flocculation of Algae from Water” and provisional patent application “Methods and Apparatus for Growing Algae on a Solid Surface”.

 

In 2011, we abandoned the pursuit of provisional patent application related to “Algae Growth Lighting and Control System”.

 

In 2012, we abandoned the pursuit of provisional patent filings related to “Multi-Plane Growth Apparatus and Method”, “Systems and Methods for Monitoring and Controlling Algae Growth and Harvesting Cellular Mass and Intracellular Products”, “Method for Extracting Intracellular Products from Microorganisms Using Gas Embolism”, “Algae Harvest Appliance”, “A System, Method And Apparatus To Produce Dewatered And Densified Algae Biomass” and foreign rights for “Bio-Energy Reactor”.

 

In 2013, we transferred the rights to the patents related to "Bio Energy Reactor", "Algae Growth System for Oil Production" and "Apparatus and Method for Optimizing Photosynthetic Growth in a Photo Bioreactor" to our partner Ennesys in France.

 

In 2015, we abandoned the pursuit of Australian patent application for “Systems and Methods for Harvesting and Dewatering Algae”.

 

In 2016, we abandoned the pursuit of provisional patent filings related to “Systems, Methods and Apparatuses for Dewatering, Flocculating and Harvesting Algae Cells”, “Monitoring Systems for Biomass Processing Systems”, “Increasing Contact Between Solutes and Solvents in an Aqueous Medium”, “Systems and Methods for Increasing Growth of Biomass Feedstocks”, and “Harvesting and Dewatering Algae Using a Two-Stage Process”.

 

None of these abandoned or transferred patents are required for our business or products and we are focusing our efforts on the patent applications listed above.

 

Research and Development

 

During the years ended December 31, 2016 and 2015, we invested $502,209 and $814,014, respectively, on research and development of our technologies.  Research and development costs include activities related to development and innovations in the core Electro Water Separation™ (EWS) technology, fabrication and scale-up of products based on this technology, development of firmware and process automation, development of new applications in industries such as aquaculture, technical support of customers, agents, joint venture partners and licensees, on-site consulting and training activities, and miscellaneous research.

 

In one outcome of this investment, OriginClear enhanced its Electro Water Separation technology by pairing it with Advanced Oxidation, for which we filed a patent in the 2nd Quarter of 2016.

 

OriginClear’s Advanced Oxidation is a patent-pending, chemical-free way to extract dissolved contaminants, such as bacteria, ammonia, pharmaceuticals and solvents. This complements the EWS technology, which effectively clarifies very dirty, oily water so that membranes and filters can do their job without clogging. 

 

Employees

 

As of March 31, 2017, we have 26 full-time employees.  We have not experienced any work stoppages and we consider relations with our employees to be good. 

 

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ITEM 1A. RISK FACTORS

 

Risks Relating to Our Business

 

We have a limited operating history which makes it difficult to evaluate our business and prospects.

 

We were formed in June 2007 and are currently developing a new technology that has not yet gained market acceptance. As such, we have a limited operating history upon which you can base an evaluation of our business and prospects. Since we have not been profitable, there are substantial risks, uncertainties, expenses and difficulties that we are subject to. To address these risks and uncertainties, we must do among the following:

 

  Successfully execute our business strategy;
     
  Respond to competitive developments; and
     
  Attract, integrate, retain and motivate qualified personnel;

 

There can be no assurance that at this time we will operate profitably or that we will have adequate working capital to meet our obligations as they become due. Investors must consider the risks and difficulties frequently encountered by early stage companies, particularly in rapidly evolving markets. We cannot be certain that our business strategy will be successful or that we will successfully address these risks. In the event that we do not successfully address these risks, our business, prospects, financial condition, and results of operations could be materially and adversely affected.

 

We have a history of losses and can provide no assurance of our future operating results.

 

We currently have limited product revenues, and may not succeed in commercializing any products which will generate product or licensing revenues. Until recently, our primary activity has been research and development. We have experienced net losses and negative cash flows from operating activities since inception and we expect such losses and negative cash flows to continue in the foreseeable future. As of December 31, 2016 and 2015, we had working capital (deficit) of $(11,056,570) and $(13,471,476), respectively, and shareholders' (deficit) of $(11,798,579) and $(12,753,117), respectively.  For the years ended December 31, 2016 and 2015, we incurred net losses of $(4,145,830) and $(11,615,066).  As of December 31, 2016, we had an aggregate accumulated deficit of $63,229,607.  We may never achieve profitability.  The opinion of our independent registered public accountants on our audited financial statements as of and for the year ended December 31, 2016 contains an explanatory paragraph regarding substantial doubt about our ability to continue as a going concern.  Our ability to continue as a going concern is dependent upon raising capital from financing transactions and future sales.

 

We will need significant additional capital, which we may be unable to obtain.

 

Revenues generated from our operations are not presently sufficient to sustain our operations. Therefore, we will need to raise additional capital to continue our operations. There can be no assurance that additional funds will be available when needed from any source or, if available, will be available on terms that are acceptable to us. We may be required to pursue sources of additional capital through various means, including debt or equity financings. Future financings through equity investments are likely to be dilutive to existing stockholders. Also, the terms of securities we may issue in future capital transactions may be more favorable for new investors. Newly issued securities may include preferences, superior voting rights, the issuance of warrants or other derivative securities, and the issuances of incentive awards under equity employee incentive plans, which may have additional dilutive effects. Further, we may incur substantial costs in pursuing future capital and/or financing, including investment banking fees, legal fees, accounting fees, printing and distribution expenses and other costs. We may also be required to recognize non-cash expenses in connection with certain securities we may issue, such as convertible notes and warrants, which will adversely impact our financial condition. Our ability to obtain needed financing may be impaired by such factors as the capital markets and our history of losses, which could impact the availability or cost of future financings. If the amount of capital we are able to raise from financing activities, together with our revenues from operations, is not sufficient to satisfy our capital needs, even to the extent that we reduce our operations accordingly, we may be required to cease operations.

 

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We have incurred substantial indebtedness.

 

As of March 30, 2017, we have convertible notes with outstanding principal and accrued but unpaid interest of approximately $4,663,477. All such debt is payable within the following twelve to forty eight months and is convertible at a significant discount to our market price of stock. Our level of indebtedness and insufficient cash on hand increases the possibility that we may be unable to generate cash sufficient to pay, when due, the principal of, interest on or other amounts due in respect of the indebtedness. Our indebtedness, combined with other financial obligations and contractual commitments, could:

 

·in the case of convertible debt that is converted into equity, result in a reduction in the overall percentage holdings of our stockholders, put downward pressure on the market price of our common stock, result in adjustments to conversion and exercise prices of outstanding notes and warrants and obligate us to issue additional shares of common stock to certain of our stockholders;

 

·make it more difficult for us to satisfy our obligations with respect to the indebtedness and any failure to comply with the obligations under any of our debt instruments, including restrictive covenants, could result in events of default under the loan agreements and instruments governing the indebtedness;

 

·require us to dedicate a substantial portion of our cash flow from operations to payments on  indebtedness, thereby reducing funds available for working capital, capital expenditures, acquisitions, research and development and other corporate purposes;

 

·increase our vulnerability to adverse economic and industry conditions, which could place us at a competitive disadvantage compared to competitors that have relatively less indebtedness;

 

·limit our flexibility in planning for, or reacting to, changes in business and the industry in which we operate; and

 

·limit our ability to borrow additional funds, or to dispose of assets to raise funds, if needed, for working capital, capital expenditures, acquisitions, research and development and other corporate purposes.

 

We may incur significant additional indebtedness in the future. If we incur a substantial amount of additional indebtedness, the related risks that we face could become more significant. Additionally, the terms of any future debt that we may incur may impose requirements or restrictions that further affect our financial and operating flexibility or subject us to other events of default.

 

Our revenues are dependent upon acceptance of our technology and products by the market; the failure of which would cause us to curtail or cease operations.

 

We believe that most of our future revenues will come from the sale or license of our technology and systems. As a result, we will continue to incur substantial operating losses until such time as we are able to generate revenues from the sale or license of our technology and systems. There can be no assurance that businesses and prospective customers will adopt our technology and systems, or that businesses and prospective customers will agree to pay for or license our technology and systems. In the event that we are not able to develop a customer base that purchases or licenses our technology and systems, or if we are unable to charge the necessary prices or license fees, our financial condition and results of operations will be materially and adversely affected.

 

We will need to increase the size of our organization, and may experience difficulties in managing growth.

 

We are a small company with a minimal number of employees. With the start of our planned principal activities, we expect to experience a period of significant expansion in headcount, facilities, infrastructure and overhead and anticipate that further expansion will be required to address potential growth and market opportunities. Future growth will impose significant added responsibilities on members of management, including the need to identify, recruit, maintain and integrate managers. Our future financial performance and our ability to compete effectively will depend, in part, on our ability to manage any future growth effectively.

 

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We may not be able to successfully develop and commercialize our technology and systems which would result in continued losses and may require us to curtail or cease operations.

 

We are currently commercializing our technology. We are unable to project when we will achieve profitability, if at all. As is the case with any new technology, we expect the research and development process to continue. We cannot assure that our engineering resources will be able to develop our technology and systems fast enough to meet market requirements. We can also not assure that our technology and systems will gain market acceptance and that we will be able to successfully commercialize the technologies. The failure to successfully develop and commercialize the technologies would result in continued losses and may require us to curtail or cease operations.

 

Our ability to produce and distribute commercially viable bio-fuel, clean-up oil and gas and waste water and aqua-feed on a commercially viable basis is unproven, which could have a detrimental effect on our ability to generate or sustain revenues.

 

The technologies we use to harvest algae, clean up oil and gas water, and waste water, have never been utilized on a full-scale commercial basis. Our Electro Water Separation (EWS) technology was only recently developed. All of the tests conducted to date by us with respect to the technology have been performed in a limited scale or small commercial scale environment and the same or similar results may not be obtainable at competitive costs on a large-scale commercial basis. We have never employed our technology under the conditions or in the volumes that will be required for us to be profitable and cannot predict all of the difficulties that may arise. Accordingly, our technology may not perform successfully on a commercial basis and may never generate any revenues or be profitable.

 

If a competitor were to achieve a technological breakthrough, our operations and business could be negatively impacted.

 

There currently exist a number of businesses that are pursuing novel processes to harvest algae, clean up oil and gas water, and waste water. Should a competitor achieve a research and development, technological or biological breakthrough where process costs are significantly reduced, efficiency greatly increased over ours, or if the costs of similar competing products were to fall substantially, we may have difficulty attracting customer licensees or sales. In addition, competition from other technologies considered “green” (environmental) or “blue” (water technology) could lessen the demand for the end-products produced by our technology. Furthermore, competitors may have access to larger resources (capital or otherwise) that provide them with an advantage in the marketplace, which could result in a negative impact on our business.

 

Any competing technology that harvests algae, cleans up oil and gas water, and waste water, at a superior scale and more cost efficient than ours, could render our technology obsolete. In addition, because we do not have any issued patents for all but one of our patent applications, we may not be able to preclude development of even directly competing technologies using the same methods, materials and procedures as we use to achieve our results. Any of these competitive forces may inhibit or materially adversely affect our ability to attract customer licensees, or to obtain royalties or other fees from our customer licensees. This could have a material adverse effect on our business, prospects, results of operation and financial condition.

 

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Our long-term success depends on future royalties paid to us by licensees, and we face the risks inherent in a royalty-based business model.

 

We intend to generate revenue through the licensing of our technology and systems, and our long-term success depends on future royalties paid to us by prospective customer licensees. The amount of royalty payments we may receive is expected to be based upon the revenues generated by our prospective customer licensees’ operations, and so we will be dependent on the successful operations of our prospective customer licensees for a significant portion of our revenues. We face risks inherent in a royalty-based business model, many of which are outside of our control, including those arising from our reliance on the management and operating capabilities of our customer licensees and the cyclicality of supply and demand for end-products produced using our technology. Should our prospective customer licensees fail to achieve sufficient profitability in their operations, our royalty payments would be diminished and our results of operations, cash flows and financial condition could be adversely affected, and any such effects could be material.

  

We rely on strategic partners.

 

We rely on strategic partners to aid in the development and marketing of our technology and processes. Should our strategic partners not regard us as significant to their own businesses, they could reduce their commitment to us or terminate their relationship with us, pursue competing relationships or attempt to develop or acquire processes that compete with ours. Any such action could materially adversely affect our business.

 

A lack of government subsidies may hinder the usefulness of our technology.

 

While our long-term business model is based on licensing our technology to original equipment manufacturers (OEMs), distributors, resellers, service providers and other licensees, we also assemble and sell complete solutions based on EWS. Subsidies of any of the industries vary and may be reduced or eliminated, which could have a material adverse effect on our business. Likewise, regulations may become more onerous which also could have a material adverse effect on our business.

 

The industries in which we operate may endure deflationary cycles, affecting our ability to sell and license our systems.

 

If the current low cost of crude persists, it may become difficult or impossible to sell or license systems to the oil and gas industry, and the field of biofuels may become economically unviable. Such events and other deflationary events may impact our business materially. 

 

If we lose key employees and consultants or are unable to attract or retain qualified personnel, our business could suffer.

 

Our success is highly dependent on our ability to attract and retain qualified scientific, engineering and management personnel. We are highly dependent on our management, including T. Riggs Eckelberry, who has been critical to the development of our technology and business. The loss of the services of Mr. Eckelberry would have a material adverse effect on our operations. We do not have an employment agreement with Mr. Eckelberry. Accordingly, there can be no assurance that he will remain associated with us. His efforts will be critical to us as we continue to develop our technology and as we attempt to transition to a company with profitable company commercialized products and services. If we were to lose Mr. Eckelberry, or any other key employees or consultants, we may experience difficulties in competing effectively, developing our technology and implementing our business strategies.

 

Competition from other companies in our market may affect the market for our technology.

 

New companies are constantly entering the market, thus increasing the competition. This could also have a negative impact on us or our customers’ ability to obtain additional capital from investors. Larger foreign owned and domestic companies which have been engaged in water cleanup and algae harvesting for substantially longer periods of time may have access to greater financial and other resources. These companies may have greater success in the recruitment and retention of qualified employees, as well as in conducting their own fuel manufacturing and marketing operations, which may give them a competitive advantage. In addition, actual or potential competitors may be strengthened through the acquisition of additional assets and interests. If we or our customers are unable to compete effectively or adequately respond to competitive pressures, this may materially adversely affect our results of operation and financial condition.

 

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Risks Related to Our Intellectual Property

 

If we fail to establish, maintain and enforce intellectual property rights with respect to our technology, our financial condition, results of operations and business could be negatively impacted.

 

Our ability to establish, maintain and enforce intellectual property rights with respect to the technology that we intend to license will be a significant factor in determining our future financial and operating performance. We seek to protect our intellectual property rights by relying on a combination of patent, trade secret and copyright laws. We also use confidentiality and other provisions in our agreements that restrict access to and disclosure of our confidential know-how and trade secrets.

 

We have filed patent applications with respect to many aspects of our technologies. However, we cannot provide any assurances that any of these applications will ultimately result in issued patents or, if patents are issued, that they will provide sufficient protections for our technology against competitors. Although we have filed various patent applications for some of our core technologies, we currently hold only five issued patents, one each in in the United States, Australia, Japan, China and Mexico and we may face delays and difficulties in obtaining our other filed patents, or we may not be able to obtain such patents at all. 

 

Outside of these patent applications, we seek to protect our technology as trade secrets and technical know-how. However, trade secrets and technical know-how are difficult to maintain and do not provide the same legal protections provided by patents. In particular, only patents will allow us to prohibit others from using independently developed technology that are similar. If competitors develop knowledge substantially equivalent or superior to our trade secrets and technical know-how, or gain access to our knowledge through other means such as observation of our technology that embodies trade secrets at customer sites which we do not control, the value of our trade secrets and technical know-how would be diminished.

 

While we strive to maintain systems and procedures to protect the confidentiality and security of our trade secrets and technical know-how, these systems and procedures may fail to provide an adequate degree of protection. For example, although we generally enter into agreements with our employees, consultants, advisors, and strategic partners restricting the disclosure and use of trade secrets, technical know-how and confidential information, we cannot provide any assurance that these agreements will be sufficient to prevent unauthorized use or disclosure. In addition, some of the technology deployed at customer sites in the future, which we do not control, may be readily observable by third parties who are not under contractual obligations of non-disclosure, which may limit or compromise our ability to continue to protect such technology as a trade secret.

 

Monitoring and policing unauthorized use and disclosure of intellectual property is difficult. If we learned that a third party was in fact infringing or otherwise violating our intellectual property, we may need to enforce our intellectual property rights through litigation. Litigation relating to our intellectual property may not prove successful and might result in substantial costs and diversion of resources and management attention.

 

From our customer licensee’s standpoint, the strength of the intellectual property under which we intend to grant licenses can be a critical determinant of the value of these licenses. If we are unable to secure, protect and enforce our intellectual property, it may become more difficult for us to attract new customers.  Any such development could have a material adverse effect on our business, prospects, financial condition and results of operations.

 

Although we have filed various patent applications for some of our core technologies, we currently hold only five issued patents, one each in the United States, Australia, Japan, China and Mexico, and we may face delays and difficulties in obtaining other filed patents, or we may not be able to obtain such patents at all.

 

Patents are a key element of our intellectual property strategy. We have over thirty currently pending patent applications in the United States and abroad but, to date, other than the five issued patents, no patents have been issued from these other applications. It may take a long time for any patents to issue from the applications, and we cannot provide any assurance that any patents will ultimately be issued or that any patents that do ultimately issue will issue in a form that will adequately protect our commercial advantage.

 

Our ability to obtain patent protection for our technologies is uncertain due to a number of factors, including that we may not have been the first to make the inventions covered by our pending patent applications or to file patent applications for these inventions.

 

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Further, changes in U.S. and foreign patent law may also impact our ability to successfully prosecute our patent applications. For example, the United States Congress and other foreign legislative bodies may amend their respective patent laws in a manner that makes obtaining patents more difficult or costly. Courts may also render decisions that alter the application of patent laws and detrimentally affect our ability to obtain patent protection. 

 

Even if patents do ultimately issue from our patent applications, these patents may not provide meaningful protection or commercial advantage. In the US, patents only provide protection for a 20-year period starting from the filing date and the longer a patent application takes to issue the less time there is to enforce it. Further, the claims under any patents that issue from our applications may not be broad enough to prevent others from developing technologies that are similar or that achieve similar results. It is also possible that the intellectual property rights of others will bar us from licensing our technology and bar us or our future licensees from exploiting any patents that issue from our pending applications. Numerous U.S. and foreign issued patents and pending patent applications owned by others exist in the fields in which we have developed and are developing our technology. These patents and patent applications might have priority over our patent applications and could subject our patent applications to invalidation. Finally, in addition to those who may claim priority, any patents that issue from our applications may also be challenged by our competitors on the basis that they are otherwise invalid or unenforceable.

 

We may face claims that we are violating the intellectual property rights of others.

 

We may face claims, including from direct competitors, other energy companies, scientists or research universities, asserting that our technology or the commercial use of such technology infringes or otherwise violates the intellectual property rights of others. We have not conducted infringement, freedom to operate or landscape analyses, and as a result we cannot be certain that our technologies and processes do not violate the intellectual property rights of others. We expect that we may increasingly be subject to such claims as we begin to earn revenues and our market profile grows.

 

We may also face infringement claims from the employees, consultants, agents and outside organizations we have engaged to develop our technology. While we have sought to protect ourselves against such claims through contractual means, we cannot provide any assurance that such contractual provisions are adequate, and any of these parties might claim full or partial ownership of the intellectual property in the technology that they were engaged to develop.

 

If we were found to be infringing or otherwise violating the intellectual property rights of others, we could face significant costs to implement work-around methods, and we cannot provide any assurance that any such work-around would be available or technically equivalent to our current technology. In such cases, we might need to license a third party’s intellectual property, although any required license might not be available on acceptable terms, or at all. If we are unable to work around such infringement or obtain a license on acceptable terms, we might face substantial monetary judgments against us or an injunction against continuing to license our technology, which might cause us to cease operations.

 

In addition, even if we are not infringing or otherwise violating the intellectual property rights of others, we could nonetheless incur substantial costs in defending ourselves in suits brought against us for alleged infringement. Also, if any license agreements provide that we will defend and indemnify our customer licensees for claims against them relating to any alleged infringement of the intellectual property rights of third parties in connection with such customer licensees’ use of our technologies, we may incur substantial costs defending and indemnifying any customer licensees to the extent they are subject to these types of claims. Such suits, even if without merit, would likely require our management team to dedicate substantial time to addressing the issues presented. Any party bringing claims might have greater resources than we do, which could potentially lead to us settling claims against which we might otherwise prevail on the merits.

 

Any claims brought against us or any customer licensees alleging that we have violated the intellectual property of others could have negative consequences for our financial condition, results of operations and business, each of which could be materially adversely affected as a result.

 

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Risks Related to Our Common Stock

   

Our common stock could be further diluted as the result of the issuance of additional shares of common stock, convertible securities, warrants or options.

 

In the past, we have issued common stock, convertible securities (such as convertible debentures and notes) and warrants in order to raise money, some of which have anti-dilution and other similar protections. We have also issued options and warrants as compensation for services and incentive compensation for our employees and directors. We have shares of common stock reserved for issuance upon the exercise of certain of these securities and may increase the shares reserved for these purposes in the future. Our issuance of additional common stock, convertible securities, options and warrants could affect the rights of our stockholders, result in a reduction in the overall percentage holdings of our stockholders, could put downward pressure on the market price of our common stock, could result in adjustments to conversion and exercise prices of outstanding notes and warrants, and could obligate us to issue additional shares of common stock to certain of our stockholders.

 

There may be a limited public market for our securities.

 

Trading in our common stock continues to be conducted on the electronic bulletin board in the over-the-counter market. As a result, an investor may find it difficult to dispose of or to obtain accurate quotations as to the market value of our common stock, and our common stock may be less attractive for margin loans, for investment by financial institutions, as consideration in future capital raising transactions or other purposes.

 

Additionally, on November 1, 2016, the Company received a notice from the OTCQB Marketplace (the “OTCQB”) advising the Company that its bid price has closed below $0.01 for more than 30 consecutive calendar days and no longer meets the Standards for Continued Eligibility for OTCQB as per the OTCQB standards.  Pursuant to the OTCQB standards, the Company has been granted a period of 180 calendar days in which to regain compliance with Section 2.3, or until April 30, 2017.  If, at that time, the Company’s bid price has not closed at or above $0.01 for any ten consecutive trading days then the security will be removed from the OTCQB marketplace and as result it may be difficult to trade in our common stock .

 

The price of our common stock is volatile, which may cause investment losses for our stockholders.

 

The market for our common stock is highly volatile, having ranged during the fiscal year ended December 31, 2016 from a low of $0.0048 to a high of $0.03 on the OTCQB. The trading price of our common stock on the OTCBB is subject to wide fluctuations in response to, among other things, quarterly variations in operating and financial results, and general economic and market conditions. In addition, statements or changes in opinions, ratings, or earnings estimates made by brokerage firms or industry analysts relating to our market or relating to us could result in an immediate and adverse effect on the market price of our common stock. The highly volatile nature of our stock price may cause investment losses for our shareholders. In the past, securities class action litigation has often been brought against companies following periods of volatility in the market price of their securities. If securities class action litigation is brought against us, such litigation could result in substantial costs while diverting management’s attention and resources.

  

Shares eligible for future sale may adversely affect the market.

 

From time to time, certain of our stockholders may be eligible to sell all or some of their shares of common stock by means of ordinary brokerage transactions in the open market pursuant to Rule 144 promulgated under the Securities Act, subject to certain limitations. In general, pursuant to Rule 144, non-affiliate stockholders may sell freely after six months subject only to the current public information requirement. Affiliates may sell after six months subject to the Rule 144 volume, manner of sale (for equity securities), current public information and notice requirements.  As of March 30, 2017, Mr. Eckelberry, our Chief Executive Officer and Chairman, beneficially owns 60,759,645 shares of our common stock (including 60,000,000 shares of our common stock issuable upon the exercise of stock options at a price of $0.0375 per share). Any substantial sales of our common stock pursuant to Rule 144 may have a material adverse effect on the market price of our common stock.

 

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Our stock is subject to the penny stock rules, which impose significant restrictions on broker-dealers and may affect the resale of our stock.

 

Our common stock has been subject to the provisions of Section 15(g) and Rule 15g-9 of the Securities Exchange Act of 1934, as amended (the “Exchange Act”), commonly referred to as the “penny stock” rule. Section 15(g) sets forth certain requirements for transactions in penny stocks and Rule 15g-9(d)(1) incorporates the definition of penny stock as that used in Rule 3a51-1 of the Exchange Act. The SEC generally defines penny stock to be any equity security that has a market price less than US$5.00 per share, subject to certain exceptions. Rule 3a51-1 provides that any equity security is considered to be penny stock unless that security is: registered and traded on a national securities exchange meeting specified criteria set by the SEC; issued by a registered investment company; excluded from the definition on the basis of price (at least US$5.00 per share) or the registrant’s net tangible assets; or exempted from the definition by the Commission. Our common stock is considered to be a “penny stock.” The SEC has adopted rules that regulate broker-dealer practices in connection with transactions in “penny stocks.” As our common stock is considered to be “penny stock,” trading in our common stock will be subject to additional sales practice requirements on broker-dealers who sell penny stock to persons other than established customers and accredited investors. This may reduce the liquidity and trading volume of our shares.

 

Financial Industry Regulatory Authority, Inc. (“FINRA”) sales practice requirements may limit a shareholder’s ability to buy and sell our common shares.

 

In addition to the “penny stock” rules described above, FINRA has adopted rules that require that in recommending an investment to a customer, a broker-dealer must have reasonable grounds for believing that the investment is suitable for that customer. Prior to recommending speculative low priced securities to their non-institutional customers, broker-dealers must make reasonable efforts to obtain information about the customer’s financial status, tax status, investment objectives and other information. Under interpretations of these rules, FINRA believes that there is a high probability that speculative low priced securities will not be suitable for at least some customers. FINRA requirements make it more difficult for broker-dealers to recommend that their customers buy our common stock, which may limit your ability to buy and sell our stock and have an adverse effect on the market for our shares.

 

We failed to maintain effective internal controls over financial reporting and as such the price of our common stock may be adversely affected. 

 

We are required to establish and maintain appropriate internal controls over financial reporting. During the year ended December 31, 2016, we carried out an evaluation, under the supervision and with the participation of our management, including the principal executive officer and the principal financial officer, of the effectiveness of the design and operation of our disclosure controls and procedures. Based on that evaluation and due to the lack of segregation of duties partly due to small Company staff size, our principal executive officer and principal financial officer concluded that our disclosure controls and procedures were ineffective as of the end of the period covered by this report. Failure to establish those controls, or any failure of those controls once established, could adversely affect our public disclosures regarding our business, prospects, financial condition or results of operations. In addition, management’s assessment of internal controls over financial reporting may identify weaknesses and conditions that need to be addressed in our internal controls over financial reporting or other matters that may raise concerns for investors. Any actual or perceived weaknesses and conditions that need to be addressed in our internal control over financial reporting or disclosure of management’s assessment of our internal controls over financial reporting may have an adverse impact on the price of our common stock.

 

We are required to comply with certain provisions of Section 404 of the Sarbanes-Oxley Act of 2002 and if we fail to comply in a timely manner, our business could be harmed and our stock price could decline.

 

Rules adopted by the SEC pursuant to Section 404 of the Sarbanes-Oxley Act of 2002 require an annual assessment of internal controls over financial reporting, and for certain issuers an attestation of this assessment by the issuer’s independent registered public accounting firm.  The standards that must be met for management to assess the internal controls over financial reporting as effective are evolving and complex, and require significant documentation, testing, and possible remediation to meet the detailed standards.  We expect to incur significant expenses and to devote resources to Section 404 compliance on an ongoing basis.  It is difficult for us to predict how long it will take or costly it will be to complete the assessment of the effectiveness of our internal control over financial reporting for each year and to remediate any deficiencies in our internal control over financial reporting. As a result, we may not be able to complete the assessment and remediation process on a timely basis.  In addition, although attestation requirements by our independent registered public accounting firm are not presently applicable to us we could become subject to these requirements in the future and we may encounter problems or delays in completing the implementation of any resulting changes to internal controls over financial reporting.  In the event that our Chief Executive Officer or Chief Financial Officer determine that our internal control over financial reporting is not effective as defined under Section 404, we cannot predict how regulators will react or how the market prices of our shares will be affected; however, we believe that there is a risk that investor confidence and share value may be negatively affected.

 

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We do not intend to pay dividends.

 

We do not anticipate paying cash dividends on our common stock in the foreseeable future. We may not have sufficient funds to legally pay dividends. Even if funds are legally available to pay dividends, we may nevertheless decide in our sole discretion not to pay dividends. The declaration, payment and amount of any future dividends will be made at the discretion of our board of directors, and will depend upon, among other things, the results of our operations, cash flows and financial condition, operating and capital requirements, and other factors our board of directors may consider relevant. There is no assurance that we will pay any dividends in the future, and, if dividends are paid, there is no assurance with respect to the amount of any such dividend.

 

ITEM 1B. UNRESOLVED STAFF COMMENTS.

 

Not applicable.

 

ITEM 2. PROPERTIES.

 

Our principal offices are located at 525 S. Hewitt Street, Los Angeles, California 90013. We rent a portion of a 30,000 square foot corporate building at a current monthly rent of $3,750. PWT, our Dallas based subsidiary, rents approximately a 12,000 square foot facility at 2535 E. University Drive, McKinney, TX 75069, with a current monthly rent of $4,850.

 

ITEM 3. LEGAL PROCEEDINGS.

 

From time to time we may be a defendant and plaintiff in various legal proceedings arising in the normal course of our business. We are currently not a party to any pending legal proceeding, nor is our property the subject of a pending legal proceeding, that is not in the ordinary course of business or otherwise material to the financial condition of our business. None of our directors, officers or affiliates is involved in a proceeding adverse to our business or has a material interest adverse to our business.

 

ITEM 4. MINE SAFETY DISCLOSURES.

 

Not applicable.

 

29

 

 

PART II

 

ITEM 5. MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS ISSUER PURCHASES OF EQUITY SECURITIES.

 

Our common stock is quoted on the OTCQB under the symbol “OCLN”.

 

For the periods indicated, the following table sets forth the high and low bid prices per share of common stock. These prices represent inter-dealer quotations without retail markup, markdown, or commission and may not necessarily represent actual transactions.

 

  

Fiscal Year

2016

 
   High   Low 
First Quarter  $0.030    0.017 
Second Quarter  $0.024    0.008 
Third Quarter  $0.015    0.008 
Fourth Quarter  $0.019    0.005 

 

  

Fiscal Year

2015

 
   High   Low 
First Quarter  $0.12    0.07 
Second Quarter  $0.08    0.04 
Third Quarter  $0.06    0.03 
Fourth Quarter  $0.04    0.02 

 

The market price of our common stock, like that of other technology companies, is highly volatile and is subject to fluctuations in response to variations in operating results, announcements of technological innovations or new products, or other events or factors. Our stock price may also be affected by broader market trends unrelated to our performance.

 

Holders

 

As of March 28, 2017, we had approximately 462 holders of record of our common stock.  This number does not include beneficial owners whose shares are held in the names of various security brokers, dealers, and registered clearing agencies.

 

Dividend Policy

 

We have never paid any cash dividends on our common stock and do not anticipate paying any cash dividends on our common stock in the foreseeable future. We intend to retain future earnings to fund ongoing operations and future capital requirements of our business. Any future determination to pay cash dividends will be at the discretion of the board of directors and will be dependent upon our financial condition, results of operations, capital requirements and such other factors as the board of directors deems relevant.

 

Recent Sales of Unregistered Securities

 

There were no sales of unregistered securities during the fiscal year ended December 31, 2016 other than those transactions previously reported to the SEC on our quarterly reports on Form 10-Q and current reports on Form 8-K.

 

Purchases of Equity Securities by the Issuer and Affiliated Purchasers

 

None.

 

ITEM 6. SELECTED FINANCIAL DATA.

 

N/A

 

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ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATION.

 

The following discussion and analysis should be read together with our financial statements and the related notes appearing elsewhere in this Annual Report on Form 10-K. This discussion contains forward-looking statements reflecting our current expectations that involve risks and uncertainties. See “Forward-Looking Statements” for a discussion of the uncertainties, risks and assumptions associated with these statements. Actual results and the timing of events could differ materially from those discussed in our forward-looking statements as a result of many factors, including those set forth under “Risk Factors” and elsewhere in this Annual Report on Form 10-K.

 

Overview of Business

 

OriginClear is a leading provider of water treatment solutions and the developer of a breakthrough water cleanup technology.

 

Through its wholly owned subsidiaries, OriginClear provides systems and services to treat water in a wide range of industries, such as municipal, pharmaceutical, semiconductors, industrial, and oil & gas. To rapidly grow this segment of the business, we strategically acquire profitable and well-managed water treatment companies, which allow us to expand our global market presence and technical expertise.

To enable a new era of clean and socially responsible water treatment solutions, we invented Electro Water Separation™, a breakthrough high-speed water cleanup technology using multi-stage electrochemistry, that we license worldwide to water treatment equipment manufacturers.

 

Water is our most valuable resource, and the mission of The OriginClear Group™ is to improve the quality of water and help return it to its original and clear condition.

 

The Group

 

In 2015, OriginClear embarked on a corporate strategy to rapidly acquire leading U.S. water service companies focused on specialized water treatment. OriginClear aims to offer a complementary, end-to-end offering to serve growing corporate demand for outsourced water treatment.

 

On October 1, 2015, Dallas-based Progressive Water Treatment, Inc. (“PWT”) became the first acquisition in The OriginClear Group. PWT is a fast-growing designer, builder and service provider for a wide range of industrial water treatment applications.

 

The Technology

 

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. EWS is designed to be an early step in removal of oils, solids and pathogens; reducing the work that more expensive, downstream processes such as Ultra Filtration or Reverse Osmosis must do, therefore enabling more cost-efficient and high-volume water cleanup overall.

 

In March of 2016, OriginClear announced that it had successfully developed and proved Advanced Oxidation for its breakthrough water cleanup system, Electro Water Separation™, or EWS. University laboratory tests have shown that EWS with Advanced Oxidation (EWS:AOx™) can now extract dissolved contaminants, which are otherwise difficult to remove without chemicals such as chlorine.

 

Today, we are capable of pairing the two technologies as EWS:AOx™, or separately, as the application requires. OriginClear believes that its technology is valuable to the industry because it has the potential to greatly extend the life of membranes and filters by effectively treating very dirty, oily water, while reducing chemical use significantly.

 

OriginClear also believes that its Advanced Oxidation technology will help neutralize harmful micro-contaminants, such as industrial solvents, which is difficult or impossible to achieve with other technologies.

 

Overall, the system has shown a dramatic reduction in Total Organic Compounds which includes all forms of organic contamination, solids, miscible or dissolved, to meet new stringent global discharge requirements. Our technology integrates easily with other industry processes. We have begun to embed our technology into larger systems through licensing and joint ventures.

 

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Technology Licensing

 

For its first eight years of operations, OriginClear focused uniquely on development and commercialization of its breakthrough Electro Water Separation™ technology. In 2015, the technology went into commercial phase, and the Company launched it as OriginClear Technologies, operating in parallel to the OriginClear Group. The mission of OriginClear Technologies is to develop Electro Water Separation™ and achieve its full recognition as an international industry standard in treating our increasingly complex wastewater treatment challenges. A key element of this strategy is OriginClear (HK), OriginClear’s wholly-owned subsidiary in Hong Kong that manages Asia-Pacific market development, with a special focus on China sales and manufacturing.

 

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.

 

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 (“ASC 605-35”). 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 and estimated earnings in excess of billings”, represents revenues recognized in excess of amounts billed on contracts in progress. The Liability, “Billings in excess of costs and estimated earnings”, represents billings in excess of revenues recognized on contracts in progress.

 

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 reported amounts of assets and liabilities, disclosure of contingent assets and liabilities at the date of the financial statements, and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. Significant estimates include estimates used to review the Company’s goodwill, impairments and estimations of long-lived assets, revenue recognition on percentage of completion type contracts, allowances for uncollectible accounts, inventory valuation, 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.

 

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 December 31, 2016, 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 adopted a recently issued accounting pronouncement during the year ended December 31, 2016, as disclosed in the Notes to the financial statements included in this report.

 

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Results of Operations for the years ended December 31, 2016 and 2015.

 

   Year Ended 
   December 31,
2016
   December 31,
2015
 
Revenue  $5,071,095   $954,470 
Cost Of Goods Sold   3,589,165    841,903 
Operating Expenses, Depreciation and Amortization   5,071,644    7,079,124 
           
Loss from Operations before Other Income/(Expense)   (3,589,714)   (6,966,557)
           
Other Income/(Expense)   (556,116)   (4,648,509)
           
Net Loss  $(4,145,830)  $(11,615,066)

 

Revenue and Cost of Sales

 

Revenue for the year ended December 31, 2016 and 2015 was $5,071,095 and $954,470, respectively. Cost of sales for the year ended December 31, 2016 and 2015, was $3,589,165 and $841,903, respectively. The revenue and cost of sales for 2016 included full year activity from PWT and OriginClear Hong Kong subsidiaries. The increase in revenue and cost of sales was due to the acquisition of PWT.

 

We have experienced strong revenue growth since 2015, primarily as a result of the acquisition of PWT on October 1, 2015. 

 

Operating Expenses

 

Selling and Marketing Expenses

 

Selling and Marketing (“S&M”) expenses for the years ended December 31, 2016 and 2015, were $1,849,639 and $2,042,312, respectively, which included full year activity from PWT and OriginClear Hong Kong subsidiaries. 

 

General Administrative Expenses

 

General administrative (“G&A”) expenses for the years ended December 31, 2016 and 2015, were $2,674,318 and $4,200,200, respectively, which included full year activity from PWT and OriginClear Hong Kong subsidiaries.

 

Research and Development Cost

 

Research and development (“R&D”) costs decreased by $311,805 to $502,209 for the year ended December 31, 2016, compared to $814,014 for the year ended December 31, 2015.  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 $4,092,393 to $(556,116) for the year ended December 31, 2016, compared to $(4,648,509) for the year ended December 31, 2015. The decrease was the result of a decrease in non-cash accounts associated with the fair value of the derivatives in the amount of $4,595,071, and interest expense of $780,514, which includes non-cash amortization of debt discount of $487,693, offset by an increase in fair value of financing cost of $67,268, gain on sale of assets of $14,318, other income of $9,396, commitment fees of $1,191,451, penalties of $753, and foreign exchange gain of $6.

 

33

 

 

Net Loss

 

Our net loss decreased by $7,469,236 to $4,145,830 for the year ended December 31, 2016, compared to $11,615,066 for the year ended December 31, 2015. The majority of the decrease in net loss was due primarily to an increase in revenue due to the acquisition of PWT and decrease in other income and (expenses) associated with the derivatives.  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 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 consolidated financial statements do not reflect any adjustments that might result if we are unable to continue as a going concern. During the year ended December 31, 2016, we incurred a net loss of $4,145,830 and cash used in operations of $1,599,513. As of December 31, 2016, we had a working capital deficiency of $11,056,570 and a shareholders’ deficit of $11,798,579. 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, 2016 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 year ended December 31, 2016, 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 December 31, 2016 and December 31, 2015, we had cash of $351,321 and $695,295, respectively and working capital deficit of $11,056,570 and $13,471,476 respectively.  The decrease in working capital deficit was due primarily to a decrease in accounts receivable, work in progress, accounts payable, non-cash derivative liabilities, and convertible notes, with an increase in cost in excess of billing, prepaid expenses, accrued expenses and other assets.

 

During the year ended December 31, 2016, we raised an aggregate of $125,000 in an offering of unsecured convertible notes.  Our ability to continue as a going concern is dependent upon raising capital from financing transactions and future revenue, however, there cannot be any assurance that we will be able to raise additional capital from financings.

 

Net cash used in operating activities was $(1,599,513) for the year ended December 31, 2016, compared to $(3,010,710) for the year ended December 31, 2015. The decrease of $1,411,197 in cash used in operating activities was due primarily to the net decrease in net loss due to the overall decrease in general and administrative expenses as well as research and development.. Currently operating costs exceed revenue because sales are not yet significant.

 

Net cash flows provided by (used) in investing activities for the year ended December 31, 2016 and 2015 were $(10,133) and $346,843 respectively.  The net decrease in cash provided in investing activities was due to the acquisition of our PWT subsidiary in the prior year.

 

Net cash flows provided by financing activities was $1,265,717 for the year ended December 31, 2016, as compared to $3,160,731 for the prior year ended December 31, 2015.  The decrease in cash provided by financing activities was due to a decrease in debt financing with the issuance of convertible notes and a decrease in equity financing. To date we have principally financed our operations through the sale of our common stock and the issuance of debt.

 

34

 

 

We do not have any material commitments for capital expenditures during the next twelve months.  Although our proceeds from the issuance of convertible debt together with revenue from operations are currently sufficient to fund our operating expenses in the near future, 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 nine 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.

 

Additional Information

 

Between March 17, 2017 and March 29, 2017, the Company sold, in a private placement, an aggregate of 5,800,000 shares of its common stock to accredited investors for an aggregate consideration of $29,000 (the “Offering”). The shares issued in this Offering are subject to price protection for a period of one year from the issuance of the share, if under certain circumstances, the Company will issue additional shares of common stock of the Company for no additional consideration to the subscribers thereunder. The subscribers agree to the lock-up provision, under which subject to certain terms and conditions therein, the subscribers shall not sell any of their shares of common stock of the Company obtained in this Offering for a period of twelve months.

 

On March 27, 2017, the Company received the unanimous written consent of the holder of a majority of the issued and outstanding shares of capital stock of the Company, pursuant to which it was approved that the Board of Directors be permitted, but not required, to effectuate a reverse stock split of the Company’s common stock by a ratio of not less than one (1) for two (2) and not more than one (1) for one hundred (100) (the “Range”), with the exact ratio to be set at a whole number within the Range as determined by the Board in its sole discretion.

 

On March 28, 2017, holders of convertible promissory notes converted an aggregate principal and interest amount of $134,138 into an aggregate of 56,256,401 shares of the Company’s common stock

 

On March 29, 2017, the Company issued to three employees an aggregate of 12,142,858 shares of the Company’s common stock in lieu of cash consideration.

 

On March 29, 2017, the Company issued to two members of the Board of Directors an aggregate of 6,000,000 shares of the Company’s common stock for services in lieu of cash consideration.

 

On March 29, 2017, the Company issued to consultants an aggregate of 7,000,000 shares of the Company’s common stock in lieu of cash consideration. 

The issuances of the securities under the caption Additional Information, were offered and sold pursuant to an exemption from the registration requirements under Section 4(a)(2) of the Securities Act 1933, as amended 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. 

 

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 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.

 

Not applicable.

 

ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.

 

All financial information required by this Item is attached hereto at the end of this report beginning on page F-1 and is hereby incorporated by reference.

 

ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE.

 

None

 

35

 

 

ITEM 9A. CONTROLS AND PROCEDURES.

 

Evaluation of Disclosure Controls and Procedures

 

We carried out an evaluation, under the supervision and with the participation of our management, including our principal executive officer and principal financial officer, of the effectiveness of our disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)).  Based upon that evaluation, our principal executive officer and principal financial officer concluded that, as of the end of the period covered in this report, our disclosure controls and procedures were ineffective to ensure that information required to be disclosed in reports filed under the Securities Exchange Act of 1934, as amended, is recorded, processed, summarized and reported within the required time periods specified in the Commission’s rules and forms and is accumulated and communicated to our management, including our principal executive officer and principal financial officer, as appropriate to allow timely decisions regarding required disclosure.

 

Our management, including our principal executive officer and principal financial officer, do not expect that our disclosure controls and procedures or our internal controls will prevent all errors or fraud.  A control system, no matter how well conceived and operated, can provide only reasonable, not absolute, assurance that the objectives of the control system are met.  Further, the design of a control system must reflect the fact that there are resource constraints and the benefits of controls must be considered relative to their costs.  Due to the inherent limitations in all control systems, no evaluation of controls can provide absolute assurance that all control issues and instances of fraud, if any, have been detected. During the quarter ended December 31, 2016, we carried out an evaluation, under the supervision and with the participation of our management, including the principal executive officer and the principal financial officer, of the effectiveness of the design and operation of our disclosure controls and procedures. Based on that evaluation and due to the lack of segregation of duties partly due to small Company staff size, our principal executive officer and principal financial officer concluded that our disclosure controls and procedures were ineffective as of the end of the period covered by this report.

 

To address the significant deficiency, we performed additional analysis and other post-closing procedures in an effort to ensure our consolidated financial statements included in this annual report have been prepared in accordance with generally accepted accounting principles.  Accordingly, management believes that the financial statements included in this report fairly present in all material respects our financial condition, results of operations and cash flows for the periods presented.

 

Management’s Report on Internal Control Over Financial Reporting

 

Our management is responsible for establishing and maintaining adequate internal control over financial reporting as defined in Rule 13a-15(f) under the Securities Exchange Act of 1934, as amended.  Our management assessed the effectiveness of our internal control over financial reporting as of December 31, 2016.  In making this assessment, our management used the criteria set forth by the Committee of Sponsoring Organizations of the Treadway Commission ("COSO") in Internal Control-Integrated Framework (2013).  A significant deficiency is a deficiency, or a combination of deficiencies, in internal control over financial reporting that is less severe than a material weakness, yet important enough to merit attention by those responsible for oversight of the registrant’s financial reporting.  

 

Management has identified control deficiencies regarding the lack of segregation of duties and the need for a stronger internal control environment. Management of the Company believes that these significant deficiencies are primarily due to the continued integration of the 2015 acquisitions of Progressive Water Treatment, Inc., specifically as pertains to revenue recognition. The small size of the Company’s accounting staff may prevent adequate controls in the future, such as segregation of duties, due to the cost/benefit of such remediation.  

 

The Company intends to add additional resources and controls during year 2017 to mitigate the above significant deficiency.

 

Changes in Internal Control Over Financial Reporting

 

There was no change in our internal control over financial reporting (as defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act) during the fiscal quarter ended December 31, 2016 that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.

 

No Attestation Report by Independent Registered Accountant

 

The effectiveness of our internal control over financial reporting as of December 31, 2016 has not been audited by our independent registered public accounting firm by virtue of our exemption from such requirement as a smaller reporting company.

 

ITEM 9B. OTHER INFORMATION.

 

None

 

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PART III

 

ITEM 10. DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE.

 

EXECUTIVE OFFICERS, DIRECTORS AND KEY EMPLOYEES

 

The following table sets forth the names and ages of the members of our board of directors and our executive officers and the positions held by each. There are no family relationships among any of our directors and executive officers.

 

Name   Age   Position
T. Riggs Eckelberry   65   Chief Executive Officer, Chairman of the Board of Directors, Secretary, Treasurer, President and acting Chief Financial Officer
         
Anthony Fidaleo   58   Director
         
Jean-Louis Kindler   54   Chief Commercial Officer and Director
         
Byron Elton   62   Director

 

 

T. Riggs Eckelberry - Chief Executive Officer, Chairman of the Board of Directors, Secretary, Treasurer, President and acting Chief Financial Officer

 

Mr. Eckelberry has served as our Chief Executive Officer, Chairman, Secretary, Treasurer, President and acting Chief Financial Officer since our inception in June 2007. Mr. Eckelberry, co-inventor of the Company’s technology, brings his veteran technology management skills to the alternative energy sector. In 2007, he developed and launched OriginOil. As President and COO of CyberDefender Corporation from 2005 to 2006, he was instrumental in building the company and its innovative product line, helping to achieve initial funding and a public company filing at the end of 2006. Previously, as founder and President of TechTransform, a technology consulting firm, he specialized in high tech launches and turnarounds, helping to turn around YellowPages.com in 2004, resulting in its sale for $100 million to SBC/BellSouth, and in 2003 helping to make Panda Software a key player in the US market as the General Manager of its US unit. During the high tech boom of the 1990s, he was responsible for the global brand success of the software product, CleanSweep; as Chief Operating Officer of MicroHouse Technologies, he drove record sales and a modernization of the company’s technology, helping to achieve a successful sale of the company to Earthweb; and as VP Marketing of venture-backed TriVida, he was a key member of the team that commercialized the company’s technology and achieved the sale of this technology company to BeFree, Inc. (now part of ValueClick: VCLK).  As one of the founders of the Company and a recognized expert in the algae oil area, Mr. Eckelberry’s experience and qualifications are essential to the board of directors.

 

Anthony Fidaleo – Director

 

Mr. Fidaleo has served as our director since June 2012. Mr. Fidaleo has run his own accounting and consulting practice since 1992, primarily as an acting Chief Financial Officer or Senior Consultant for publicly traded companies ranging from start-ups to Fortune 500’s.  From November 2005 to February 2009 Mr. Fidaleo was the Chief Financial Officer, Chief Operating Officer, Executive Vice President and Member of the Board of Directors and Operating Committee for iMedia International, Inc. an early stage publicly traded interactive content solutions company.  Mr. Fidaleo is a California CPA (inactive) and was in public accounting from 1982 through 1992, primarily with BDO Seidman, LLP where he attained the level of audit senior manager. Mr. Fidaleo holds a B.S. degree in Accounting from California State University at Long Beach. Mr. Fidaleo’s accounting and financial experience qualifies him to serve as a member of our board of directors.

 

37

 

 

Jean-Louis Kindler – Chief Commercial Officer and Director

 

Mr. Kindler has served as our Chief Commercial Officer since April 1, 2014 and director since January 2014. Mr. Kindler is a veteran of 25 years as both a top executive and engineer in environmental technologies. He joins us after three years as co-founder in 2010 of Ennesys, the company’s French joint venture, where he designed its acclaimed patent-pending waste-to-energy system. Prior to that from 2006 to 2009, he served as CEO of MHS Equipment, a French nanotechnologies equipment manufacturing firm, where he led the development of a revolutionary fuel cell process. Earlier in his career he spent twenty years in Japan which gave him a unique insight into the fast-growing Asian markets. There, as principal of incubator Pacific Junction Corporation, Mr. Kindler completed various assignments such as technology sourcing for the French industrial group Alstom, implementing a hydrogen production system using waste biomass as feedstock, and developing the market for a fluids mixing technology that helped inspire early the Company inventions. Mr. Kindler holds a Masters in Economics and Public Policies from the Institute of Political Sciences in Lyon, France, and an MBA in International Management. Mr. Kindler’s executive and management experience qualifies him to serve as a member of our board of directors.

 

Byron Elton – Director

 

Mr. Elton has served as our director since January 2014. Mr. Elton is an experienced media and marketing executive with a proven record in pioneering new business development strategies and building top-flight marketing organizations. Since June, 2013, Mr. Elton is a partner of Clear Search, an executive search firm. Prior to that, from January 2009 until May 2013, Mr. Elton served as President and Chief Executive Officer of Carbon Sciences, Inc. (OTCBB: CABN) and has served as Chairman of Carbon Sciences since March 2009. Carbon Sciences is an early stage company developing a technology to convert earth destroying carbon dioxide into a useful form that will not contribute to greenhouse gas. Mr. Elton previously served as Senior Vice President of Sales for Univision Online from 2007 to 2008. Mr. Elton also served for eight years as an executive at AOL Media Networks from 2000 to 2007, where his assignments included Regional Vice President of Sales for AOL and Senior Vice President of E-Commerce for AOL Canada. His broadcast media experience includes leading the ABC affiliate in Santa Barbara, California in 1995 to 2000 and the CBS affiliate in Monterrey, California, from 1998 to 1999, in addition to serving as President of the Alaskan Television Network from 1995 to 1999. Mr. Elton studied Advertising and Marketing Communications at Brigham Young University. Mr. Elton’s executive and management experience qualifies him to serve as a member of our board of directors.

 

Election of Directors

 

Our directors are elected by the vote of a majority in interest of the holders of our voting stock and hold office until the expiration of the term for which he or she was elected and until a successor has been elected and qualified.

 

A majority of the authorized number of directors constitutes a quorum of the board of directors for the transaction of business.  The directors must be present at the meeting to constitute a quorum.  However, any action required or permitted to be taken by the board of directors may be taken without a meeting if all members of the board of directors individually or collectively consent in writing to the action.

 

Board Independence

 

We currently have four directors serving on our board of directors. We are not a listed issuer and, as such, are not subject to any director independence standards. Using the definition of “independent director,” as defined by Section 5605(a)(2) of the rules of the Nasdaq Stock Market, Anthony Fidaleo and Byron Elton would be considered an independent director.

 

38

 

 

Committees of the Board of Directors

 

We have established an audit committee and compensation committee however we have not yet nominated any members to such committees, which we intend to do in the near future. To date, our entire board has performed all of the duties and responsibilities which might be contemplated by a committee.

 

Audit Committee. The audit committee will be composed of three independent directors, one of whom that meets the requirements of an “Audit Committee Financial Expert.”  The audit committee's duties will be to recommend to the board of directors the engagement of independent auditors to audit our financial statements and to review our accounting and auditing principles.  The audit committee will review the scope and fees for the annual audit and the results of audit examinations performed by the internal auditors and independent public accountants, including their recommendations to improve the system of accounting and internal controls.  The audit committee will at all times to be composed exclusively of directors who are, in the opinion of the board of directors, free from any relationship which would interfere with the exercise of independent judgment as a committee member and who possess an understanding of financial statements and generally accepted accounting principles.

 

Compensation Committee. The compensation committee will be composed of at least two independent directors.  The compensation committee will review and approve our compensation policies, including compensation of executive officers.  The compensation committee will also review and administer our stock option plans, and recommend and approve grants of stock options under that plan.

 

We do not have a standing nominating committee nor are we required to have one. We do not currently have any established procedures by which security holders may recommend nominees to our Board of directors, however, any suggestions on directors, and discussions of board nominees in general, is handled by the entire board of directors.

 

Compensation Committee Interlocks and Insider Participation

 

None of our executive officers serves as a member of the board of directors or compensation committee of any other entity that has one or more of its executive officers serving as a member of our board of directors.

 

Code of Ethics

 

We have adopted a code of business conduct and ethics that applies to all our directors, officers (including our chief executive officer, chief financial officer and any person performing similar functions) and employees. We have made our Code of Ethics available on our website at www.originclear.com.

 

Board Leadership Structure and Role in Risk Oversight

 

Although we have not adopted a formal policy on whether the Chairman and Chief Executive Officer positions should be separate or combined, we have traditionally determined that it is in our best interests and our shareholders to combine these roles. Mr. Eckelberry has served as our Chairman since our inception in 2007. Due to the small size and early stage of the Company, we believe it is currently most effective to have the Chairman and Chief Executive Officer positions combined. Our board of directors receives and reviews periodic reports from management, auditors, legal counsel, and others, as considered appropriate regarding our company’s assessment of risks.

 

Our board of directors focuses on the most significant risks facing us and our general risk management strategy, and also ensures that risks undertaken by us are consistent with the Board’s appetite for risk. While the Board oversees our risk management, management is responsible for day-to-day risk management processes. We believe this division of responsibilities is the most effective approach for addressing the risks facing us.

  

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ITEM 11. EXECUTIVE COMPENSATION.

  

The following table sets forth the compensation to our Chief Executive Officer and Chief Commercial Officer for the years ended 2016 and 2015:

 

Name and Principal Position   Year     Salary     Bonus     Stock Awards     Option Awards     Non-Equity Incentive Plan Compensation     Non-qualified Deferred Compensation Earnings     All Other Compensation     Total  
              ($)       ($)       ($)       ($)       ($)       ($)       ($)       ($)  

T. Riggs Eckelberry,

Chairman of the Board, Acting CFO, President,

    2016       322,500       40,000                                               362,500  
Secretary & Treasurer and CEO     2015       260,000       190,000                                     450,000  
                                                                         
Jean Louis Kindler     2016       144,000       4,500                                               148,500  
Chief Commercial Officer     2015       144,000       20,900                                     164,900  

  

Outstanding Equity Awards at 2016 Fiscal Year-End

 

The following table sets forth certain information concerning option awards and stock awards held by our named executive officers as of December 31, 2016.

 

    Option Awards   Stock Awards  
Name  

Number of

Securities

Underlying

Unexercised

Options

(#)

Exercisable

   

Number of

Securities

Underlying

Unexercised

Options

(#)

Unexercisable

   

Equity

Incentive

Plan

Awards:

Number of

Securities

Underlying

Unexercised

Unearned

Options

(#)

   

Option

Exercise

Price

($)

 

Option

Expiration

Date

 

Number of

Shares or

Units of

Stock that

Have Not

Vested

(#)

   

Market

Value of

Shares or

Units of

Stock that

Have Not

Vested

($)

   

Equity

Incentive

Plan

Awards:

Number of

Unearned

Shares,

Units or

Other

Rights that

Have Not

Vested

(#)

   

Equity

Incentive

Plan

Awards:

Market or

Payout

Value of

Unearned

Shares,

Units or

Other

Rights that

Have Not

Vested

($)

 
                                                   
T. Riggs Eckelberry (1)(2)(3)         759,645                   0.43   April 12, 2018                                
       5,000,000                   0.04  

October 6,

2020

                               
      55,000,000                   0.04  

October 6,

2020

                               
                                                                   
Jean Louis Kindler (4)(5)       5,000,000                   0.04  

October 6,

2020

                               
        5,000,000                   0.04  

October 6,

2020

                               

 

(1)   On April 12, 2013, Mr. Eckelberry was granted options to purchase 759,645 shares of our common stock which are fully vested, exercisable at $0.43 per share and expire 5 years from the date of grant.

 

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(2)   On October 6, 2015, Mr. Eckelberry was granted options to purchase 5,000,000 shares of our common stock under the Company’s 2015 Equity Incentive Plan. 50% of these options vested on option grant date and 50% vested on October 6, 2016. These options are exercisable at $0.0375 per share and expire 5 years from the date of grant.
(3)   On October 6, 2015, Mr. Eckelberry was granted options to purchase 55,000,000 shares of our common stock under the Company’s 2015 Equity Incentive Plan. These options are fully vested, exercisable at $0.0375 per share and expire 5 years from the date of grant.
(4)   On October 6, 2015, Mr. Kindler was granted options to purchase 5,000,000 shares of our common stock under the Company’s 2015 Equity Incentive Plan, of which 50% vested on the option grant date and 50% vested on October 6, 2016. These options are exercisable at $0.0375 per share and expire 5 years from the date of grant.
(5)   On October 6, 2015, Mr. Kindler was granted options to purchase 5,000,000 shares of our common stock under the Company’s 2015 Equity Incentive Plan which will vest upon specific milestones being met, exercisable at $0.0375 per share and expiring 5 years from the date of grant.

 

Employment Agreements

 

We currently do not have an employment agreement with our Chief Executive Officer, Mr. Eckelberry, who is paid an annual salary of $360,000. Bonus payments, if any, are determined by the Board of Directors. For the year ended 2016, our Chief Executive Officer received bonus payments of $40,000. 

 

Employee Benefit Plans

 

Beginning June 1, 2008, we implemented a company health plan for our employees.

 

Compensation of Directors

 

Except as set forth below, our current directors presently do not receive monetary compensation for their service on the board of directors.  Directors may receive compensation for their services in the future and reimbursement for their expenses as shall be determined from time to time by resolution of the board of directors.

 

The following table reflects all compensation awarded to or earned by our directors for the fiscal year ended December 31, 2016.

 

Name  

Fees Earned

($)

   

Stock Awards

($) (1)

   

Options Awards

($)

   

Non-Equity Incentive Plan Compensation

($)

   

Nonqualified Deferred Compensation Earnings

($)

   

All Other Compensation

($)

 

Total

($)

T. Riggs Eckelberry                                                  
Jean Louis Kindler                                                  
Anthony Fidaleo (2)           $ 9,500                                    
Byron Elton (3)           $ 9,500                                    

 

 
(1) Reflects the aggregate grant date fair value of stock awards granted during the relevant fiscal year calculated in accordance with FASB ASC Topic 718.

(2)

(3)

On August 10, 2016, Mr. Fidaleo was issued 1,000,000 shares of our common stock.

On August 10, 2016, Mr. Elton was issued 1,000,000 shares of our common stock.

 

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ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS.

 

The following table sets forth certain information regarding the beneficial ownership of our common stock as of March 30, 2017 by (i) each director, (ii) each named executive officer, (iii) all directors and executive officers as a group, and (iv) each person who beneficially owns more than five percent of our common stock. Beneficial ownership is determined in accordance with the rules of the SEC. The percentage ownership of each beneficial owner is based on 1,058,011,175 outstanding shares of common stock. Except as indicated, each person listed below has sole voting and investment power with respect to the shares set forth opposite such person’s name.

 

Name and Title of Beneficial Owner   Number of 
Shares
Beneficially
Owned (1)
    Percentage
of Shares
 
T. Riggs Eckelberry,
Chief Executive Officer, Chairman, Secretary, Treasurer, President
and acting Chief Financial Officer (2)
    60,759,645         6%
                 
Jean-Louis Kindler, Director (3)     5,003,333       *  
                 
Anthony Fidaleo, Director (4)     2,250,000       *  
                 
Byron Elton, Director (5)     2,100,000       *  
                 
Directors and executive officers as a group (4 persons) (6)     70,112,978       7 %

 

* Less than 1%

(1) The address of each director and named executive officer listed above is c/o OriginClear, Inc., 525 S. Hewitt Street, Los Angeles, California 90013.
(2) Includes 60,000,000 common stock issuable upon exercise of stock options at a price of $0.0375 per share and 759,645 shares of common stock issuable upon exercise of stock options at a price of $0.43 per share.

(3)

(4)

(5)

Includes 5,000,000 common stock issuable upon exercise of stock options at a price of $0.0375 per share.

Includes 500,000 common stock issuable upon exercise of stock options at a price of $0.0375 per share.

Includes 500,000 common stock issuable upon exercise of stock options at a price of $0.0375 per share.

(6) Includes 66,000,000 common stock issuable upon exercise of stock options at a price of $0.0375 per share and 759,645 shares of common stock issuable upon exercise of stock options at a price of $0.43 per shares.

 

On October 1, 2015, the Company filed a Certificate of Designation for its Series A Preferred Stock with the Secretary of State of Nevada designating 1,000 shares of its authorized preferred stock as Series A Preferred Stock (the “Series A Preferred Stock”). The shares of Series A Preferred Stock had a par value of $0.0001 per share and provided supermajority voting rights to the holders of Series A Preferred Stock to effect equity incentive plans of the Company. The Series A Preferred Shares did not have a dividend rate or liquidation preference and were not convertible into shares of common stock. 

 

On March 30, 2017, the Company filed a Certificate of Withdrawal of the Certificate of Designation for its Series A Preferred Stock with the Secretary of State of Nevada following the mutual agreement between the Company and the holder of the Series A Preferred Stock to irrevocably cancel all of the 1,000 shares of Series A Preferred Stock outstanding.

 

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On July 31, 2015, the Board of Directors of the Company adopted a Certificate of Designation establishing the rights, preferences, privileges and other terms of Series B Preferred Stock, par value $0.0001 per share which consist of 10,000 shares (the “Series B Preferred Stock”). On October 1, 2015, the Company filed the Certificate of Designation for the Series B Preferred Stock with the Secretary of State of Nevada and Series B Shares were issued to the shareholders of Progressive Water Treatment, Inc. in connection with the share exchange agreement. One third (1/3) of the shares received by the holder may be converted into common stock beginning one (1) year after the first date on which a share of Series B Preferred Stock was issued (the “Original Issue Date); one third (1/3) may be converted beginning two (2) years after the original issue date; and the remaining one third (1/3) may be converted beginning three years after the original issue date. The number of shares of common stock issuable for each share of converted Series B Preferred Stock shall be calculated by dividing the stated value by the market price, the market price shall be the average of the closing trade prices of the twenty-five (25) days prior to the date of the conversion notice.

The Series B Preferred Stock has redemption features that are redeemable solely at the option of the Company. 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 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 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.

 

On March 15, 2017, the Company filed a Certificate of Designation for its Series C Preferred Stock with the Secretary of State of Nevada (the “Certificate of Designation”) designating 1,000 shares of its authorized preferred stock as Series C Preferred Stock. The shares of Series C Preferred Stock have a par value of $0.0001 per share. The Series C Preferred Shares do not have a dividend rate or liquidation preference and are not convertible into shares of common stock.

 

For so long as any shares of the Series C Preferred Stock remain issued and outstanding, the holders thereof, voting separately as a class, shall have voting power equal to 51% of the total vote (representing a super majority voting power) on all shareholder matters of the Company. Such vote shall be determined by the holder(s) of a majority of the then issued and outstanding shares of Series C Preferred Stock.

 

The shares of the Series C Preferred Stock shall be automatically redeemed by the Company at their par value on the first to occur of the following triggering events: (i) on the date that Mr. Eckelberry ceases, for any reason, to serve as officer, director or consultant of the Company, or (ii) on the date that the Company’s shares of common stock first trade on any national securities exchange provided that the listing rules of any such exchange prohibit preferential voting rights of a class of securities of the Company, or listing on any such national securities exchange is conditioned upon the elimination of the preferential voting rights of the Series C Preferred Stock set forth in the Certificate of Designation.

 

Additionally, the Company is prohibited from adopting any amendments to the Company’s Bylaws, Articles of Incorporation, as amended, making any changes to the Certificate of Designation establishing the Series C Preferred Stock, or effecting any reclassification of the Series C Preferred Stock, without the affirmative vote of at least 66-2/3% of the outstanding shares of Series C Preferred Stock. However, the Company may, by any means authorized by law and without any vote of the holders of shares of Series C Preferred Stock, make technical, corrective, administrative or similar changes to such Certificate of Designation that do not, individually or in the aggregate, adversely affect the rights or preferences of the holders of shares of Series C Preferred Stock.

 

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Equity Compensation Plan Information 

On July 1, 2009, we instituted the OriginOil 2009 Incentive Stock Plan (the “2009 Plan”), after approval by the board of directors and a majority of our shareholders.  Under the 2009 Plan, 500,000 shares of our common stock were reserved for use. 

 On May 25, 2012, we instituted the OriginOil 2012 Incentive Stock Plan (the “2012 Plan”), after approval by the board of directors and a majority of our shareholders.  Under the 2012 Plan, 1,000,000 shares of our common stock were reserved for use.   

On June 14, 2013, we instituted the OriginOil 2013 Incentive Stock Plan (the “2013 Plan”), after approval by the board of directors.  Under the 2013 Plan, 4,000,000 shares of our common stock were reserved for use.   

On October 2, 2015, we instituted the OriginClear, Inc. 2015 Equity Incentive Plan (the “2015 Plan”), after approval by the board of directors.  Under the 2015 Plan, 160,000,000 shares of our common stock were reserved for use.   

The purpose of the 2009 Plan, 2012 Plan, 2013 Plan and 2015 Plan is to retain executives and selected employees and consultants and reward them for making contributions to our success.  These objectives are accomplished by making long-term incentive awards under thereby providing participants with a proprietary interest in our growth and performance. Each of the plans are administered by our board of directors. 

The following table summarizes information concerning the 2009 Plan, 2012 Plan, 2013 Plan, 2015 Plan and other options outstanding as of December 31, 2016. 

Plan category  Number of
securities to be
issued upon
exercise of
outstanding
options
(a)
  

Weighted-average

exercise
price of
outstanding
options
(b)

   Securities
remaining
available
for future
issuance
under equity
compensation
plans
(excluding
securities
reflected in
column
(a))(c)
 
Equity compensation plans approved by security holders   91,884,144         .04    37,532,167 
Equity compensation plans not approved by security holders               
Total   91,884,144    .04    37,532,167 

 

ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR INDEPENDENCE. 

Except as set forth in Item 11 under “Executive Compensation,” since January 1, 2016 there has not been, nor is there any proposed transaction where we were or will be a party in which the amount involved exceeded or will exceed $120,000 and in which any director, executive officer, holder of more than 5% of any class of our voting securities, or any member of the immediate family of any of the foregoing persons had or will have a direct or indirect material interest.  

ITEM 14. PRINCIPAL ACCOUNTANT FEES AND SERVICES. 

Audit Fees 

The aggregate fees billed by our principal accountant for the audit of our annual financial statements, review of financial statements included in the quarterly reports and other fees that are normally provided by the accountant in connection with statutory and regulatory filings or engagements for the fiscal years ended December 31, 2016 and 2015 were $86,457 and $64,572 respectively. 

Tax Fees 

There were no fees billed for professional services rendered by our principal accountant for tax compliance, tax advice and tax planning for the fiscal years ended December 31, 2016 and 2015. 

All Other Fees 

There were no other fees billed for products or services provided by our principal accountant for the fiscal years ended December 31, 2016 and 2015. 

For the fiscal years ended December 31, 2016 and 2015 the audit committee considered the audit fees, audit-related fees, tax fees and other fees paid to our accountants, as disclosed above, and determined that the payment of such fees was compatible with maintaining the independence of the accountants. Our audit committee pre-approves all auditing services and all permitted non-auditing services (including the fees and terms thereof) to be performed by our independent registered public accounting firm, except for de minimis non-audit services that are approved by the audit committee prior to the completion of the audit. The audit committee may form and delegate authority to subcommittees consisting of one or more members when appropriate, including the authority to grant pre-approvals of audit and permitted non-auditing services, provided that decisions of such subcommittee to grant pre-approval is presented to the full audit committee at its next scheduled hearing. 

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ITEM 15. EXHIBITS, FINANCIAL STATEMENT SCHEDULES.

 

SEC Ref. No.    
3.1   Articles of Incorporation of OriginOil, Inc. filed with the Secretary of State of Nevada on June 1, 2007 (1)
3.2   Certificate of Change of OriginOil, Inc. filed with the Secretary of State of Nevada on July 19, 2011 (2)
3.3   Certificate of Amendment of OriginOil, Inc. filed with the Secretary of State of Nevada on  June 14, 2012 (3)
3.4   By-laws of OriginOil, Inc. (1)
3.5   Form of Certificate of Amendment of OriginOil, Inc. filed with the Secretary of State of Nevada on August 14, 2014 (4)
3.6   Certificate of Amendment of OriginOil, Inc. (5)
3.7   Series A Certificate of Designation of OriginClear, Inc. filed with the Secretary of State of Nevada on October 1, 2015 (6)
3.8   Series B Certificate of Designation of OriginClear, Inc. filed with the Secretary of State of Nevada on October 1, 2015 (6)
3.9   Certificate of Amendment of OriginClear, Inc. filed with the Secretary of State of Nevada on March 29, 2016 (7)
3.10   Certificate of Amendment of OriginClear, Inc. filed with the Secretary of State of Nevada on August 12, 2016 (8)

3.11

 

Series C Certificate of Designation of OriginClear, Inc. filed with the Secretary of State of Nevada on March 15, 2017 (9)

3.12  

Certificate of Withdrawal of Certificate of Designation of Series A Preferred Stock of OriginClear, Inc. filed with the Secretary of State of Nevada on March 30, 2017 *

10.1   Non-Statutory Stock Option Agreement dated October 6, 2015 (10)
10.2   OriginClear, Inc. 2015 Equity Incentive Plan (11)
10.3   Amended and Restated Non-Statutory Stock Option Agreement dated October 6, 2015 between T. Riggs Eckelberry and the Company (12)
10.4   Form of Restricted Stock Award between OriginClear, Inc. and T. Riggs Eckelberry (13)
10.5   Form of Restricted Stock Award between OriginClear, Inc. and T. Riggs Eckelberry (14)
31   Certification of Chief Executive Officer and Acting Chief Financial Officer pursuant to Sec. 302 of the Sarbanes-Oxley Act of 2002 (15)*
32   Certification of Chief Executive Officer and Acting Chief Financial Officer pursuant to 18 U.S.C. SECTION 1350 (15)*
101   The following materials from OriginClear Inc.’s Annual Report on Form 10-K for the year ended December 31, 2016 are formatted in XBRL (eXtensible Business Reporting Language):  (i) the Consolidated Balance Sheets, (ii) the Consolidated Statements of Operations, (iii) Consolidated Statement of Shareholders' Equity/ (Deficit), (iv) the Consolidated Statements of Cash Flow, and (iv) Notes to Consolidated Financial Statements tagged as blocks of text.

 

* Filed herewith

 

(1) Incorporated by reference to the Company’s Form SB-2 filed with the SEC on December 11, 2007.
(2) Incorporated by reference to the Company’s Current Report on Form 8-K filed with the SEC on July 20, 2011.
(3) Incorporated by reference to the Company’s Current Report on Form 8-K filed with the SEC on June 14, 2012.
(4) Incorporated by reference to the Company’s Current Report on Form 10-Q filed with the SEC on August 14, 2014.
(5) Incorporated by reference to the Company’s Current Report on Form 8-K filed with the SEC on April 16, 2015.
(6) Incorporated by reference to the Company’s Current Report on Form 8-K filed with the SEC on October 6, 2015.
(7) Incorporated by reference to the Company’s Annual Report on Form 10-K filed with the SEC on April 4, 2016.

(8)

Incorporated by reference to the Company’s 10-Q for the Quarter ended June 30, 2016 filed with the SEC on August 15, 2016.

(9) Incorporated by reference to the Company’s Current Report on Form 8-K filed with the SEC on March 16, 2017.
(10) Incorporated by reference to the Company’s 10-Q for the Quarter ended September 30, 2015 filed with the SEC on November 16, 2015.
(11) Incorporated by reference to the Company’s Current Report on Form 8-K filed with the SEC on October 6, 2015.
(12) Incorporated by reference to the Company’s Current Report on From 8-K filed with the SEC on January 8, 2016.
(13) Incorporated by reference to the Company’s 10-Q for the Quarter ended March 31, 2016 filed with the SEC on May 16, 2016.
(14) Incorporated by reference to the Company’s 10-Q for the Quarter ended June 30, 2016 filed with the SEC on August 15, 2016.
(15) In accordance with Item 601of Regulation S-K, this Exhibit is hereby furnished to the SEC as an accompanying document and is not deemed “filed” for purposes of Section 18 of the Securities Exchange Act of 1934 or otherwise subject to the liabilities of that Section, nor shall it be deemed incorporated by reference into any filing under the Securities Act of 1933.

 

45

 

 

SIGNATURES

 

In accordance with Section 13 or 15(d) of the Exchange Act, the registrant caused this report to be signed on its behalf by the undersigned, thereunto duly authorized, in the City of Los Angeles, State of California, on March 31, 2017.

 

  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)

 

Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons in the capacities and on the dates indicated.

 

Date: March  31, 2017 By: /s/ T Riggs Eckelberry
    T Riggs Eckelberry
    Director, Chief Executive Officer and
Acting Chief Financial Officer
     
Date: March 31, 2017 By: /s/ Anthony Fidaleo
    Anthony Fidaleo
    Director
     
Date: March 31, 2017 By: /s/ Jean-Louis Kindler
    Jean-Louis Kindler
    Director

 

Date: March 31, 2017 By: /s/ Byron Elton
    Byron Elton
    Director

 

46

 

 

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

 

 

To the Board of Directors and Shareholders

OriginClear, Inc.

Los Angeles, California

 

We have audited the accompanying consolidated balance sheets of OriginClear, Inc. (the “Company”) as of December 31, 2016 and 2015 and the related consolidated statements of operations, shareholders’ deficit and cash flows for the years then ended. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits.

 

We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. The Company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. Our audit included consideration of internal control over financial reporting as a basis for designing audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the Company’s internal control over financial reporting. Accordingly, we express no such opinion. An audit also includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles  used  and  significant  estimates  made  by  management,  as  well  as evaluating the  overall  financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.

 

In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of OriginClear, Inc. as of December 31, 2016 and 2015, and the results of its operations and its cash flows for the years then ended, in conformity with accounting principles generally accepted in the United States of America.

 

The accompanying financial statements have been prepared assuming that the Company will continue as a going concern. As discussed in Note 1, the Company has experienced recurring operating losses and negative cash flows from operating activities, which have resulted in a negative working capital and a stockholders’ deficit. These conditions raise substantial doubt about the Company’s ability to continue as a going concern. Management’s plans in regard to these matters are also described in Note 1 to the financial statements. The financial statements do not include any adjustments that might result from the outcome of this uncertainty.

 

/s/ Liggett & Webb, P.A 
Liggett & Webb, P. A. 
   
New York, New York  
March 31, 2017  

 

F-1

 ORIGINCLEAR, INC. AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS

 

   December 31, 2016   December 31, 2015 
         
ASSETS        
         
CURRENT ASSETS        
Cash  $351,321   $695,295 
Contracts receivable, less allowance for doubtful accounts of $50,000 and $50,000 respectively   382,895    1,066,223 
Cost in excess of billing   47,612    16,748 
Other receivable   -    100,000 
Work in progress   86,085    95,366 
Prepaid expenses   42,128    30,477 
           
TOTAL CURRENT ASSETS   910,041    2,004,109 
           
NET PROPERTY AND EQUIPMENT   161,912    197,257 
           
OTHER ASSETS          
Other asset   19,538    19,538 
Goodwill   682,145    487,447 
Trademark   4,467    4,467 
Security deposit   3,500    9,650 
           
TOTAL OTHER ASSETS   709,650    521,102 
           
TOTAL ASSETS  $1,781,603   $2,722,468 
           
LIABILITIES AND SHAREHOLDERS' DEFICIT          
           
Current Liabilities          
Accounts payable and other payable  $480,064   $604,393 
Accrued expenses   715,281    487,734 
Billing in excess of cost   -    503,718 
Customer deposit   113,950    113,950 
Warrant reserve   20,000    20,000 
Deferred income   -    150,000 
Derivative liabilities   8,702,083    9,317,475 
Convertible promissory notes, net of discount of $591,835 and $161,857, respectively   1,935,233    4,278,315 
           
Total Current Liabilities   11,966,611    15,475,585 
           
Long Term Liabilities          
Convertible promissory notes, net of discount of $11,429 and $0, respectively   1,613,571    - 
           
Total Long Term Liabilities   1,613,571    - 
           
Total Liabilities   13,580,182    15,475,585 
           
Commitments and contingencies          
           
SHAREHOLDERS' DEFICIT          
Preferred stock, $0.0001 par value, 25,000,000 shares authorized          
1,000 shares of Series A issued and outstanding, respectively   -    - 
6,666 and 10,000 shares of Series B issued and outstanding, respectively   1    1 
Common stock, $0.0001 par value, 2,500,000,000 shares authorized 749,995,940 and 232,588,828 shares issued and outstanding, respectively   74,999    23,258 
Preferred treasury stock,1000 and 0 shares outstanding, respectively   -    - 
Additional paid in capital   51,356,120    46,307,448 
Accumulated other comprehensive loss   (92)   (47)
Accumulated deficit   (63,229,607)   (59,083,777)
           
TOTAL SHAREHOLDERS' DEFICIT   (11,798,579)   (12,753,117)
           
TOTAL LIABILITIES AND SHAREHOLDERS' DEFICIT  $1,781,603   $2,722,468 

 

The accompanying notes are an integral part of these audited consolidated financial statements

F-2

 

ORIGINCLEAR, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF OPERATIONS

FOR THE YEARS ENDED DECEMBER 31, 2016 AND 2015

 

   December 31, 2016   December 31, 2015 
         
Sales  $5,071,095   $954,470 
           
Cost of Goods Sold   3,589,165    841,903 
           
Gross Profit   1,481,930    112,567 
           
Operating Expenses          
Selling and marketing expenses   1,849,639    2,042,312 
General and administrative expenses   2,674,318    4,200,200 
Research and development   502,209    814,014 
Depreciation and amortization expense   45,478    22,598 
           
Total Operating Expenses   5,071,644    7,079,124 
           
Loss from Operations   (3,589,714)   (6,966,557)
           
OTHER (EXPENSE) INCOME          
Other income   400    9,796 
Gain on sale of asset   -    14,318 
Fair value of debt financing cost   (210,440)   (143,172)
Commitment fee   (1,243,148)   (51,697)
Gain on net change in derivative liability   1,738,154    (2,856,917)
Interest expense   (841,082)   (1,620,837)
           
TOTAL OTHER (EXPENSE) INCOME   (556,116)   (4,648,509)
           
NET LOSS  $(4,145,830)  $(11,615,066)
           
BASIC AND DILUTED LOSS PER SHARE ATTRIBUTABLE TO SHAREHOLDERS’  $(0.01)  $(0.07)
           
WEIGHTED-AVERAGE COMMON SHARES OUTSTANDING, BASIC AND DILUTED   436,475,035    159,667,650 

 

The accompanying notes are an integral part of these audited consolidated financial statements

 

F-3

 

ORIGINCLEAR, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENT OF SHAREHOLDERS' DEFICIT

FOR THE YEARS ENDED DECEMBER 31, 2016 AND 2015

 

                      Accumulated         
   Preferred stock   Common stock   Additional Paid-in   Other Comprehensive   Accumulated     
   Shares   Amount   Shares   Amount   Capital   loss   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   -    -    6,840,291    684    302,997    -    -    303,681 
                                         
Common stock issued in a private placement for cash   -    -    35,568,348    3,557    1,038,493    -    -    1,042,050 
                                         
Common stock issuance for conversion of debt   -    -    61,363,210    6,136    1,452,927    -    -    1,459,063 
                                         
Common stock issuance of supplemental shares   -    -    3,857,206    385    51,311    -    -    51,696 
                                         
Common stock issued at fair value for services   -    -    25,211,601    2,521    1,258,000    -    -    1,260,521 
                                         
Stock compensation cost   -    -    -    -    1,739,620    -    -    1,739,620 
                                         
Beneficial conversion feature   -    -    -    -    26,834    -    -    26,834 
                                         
Other comprehensive loss   -    -    -    -    -    (47)   -    (47)
                                         
Preferred A shares issued   1,000    -              -              - 
                                         
Preferred B shares issued in connection with PWT   10,000    1              1,499,999              1,500,000 
                                         
Derivative liability - Preferred B shares   -    -    -    -    (1,321,152)   -    -    (1,321,152)
                                         
Net loss for the years ended December 31, 2015   -    -    -    -    -    -    (11,615,066)   (11,615,066)
Balance at December 31, 2015   11,000    1    232,588,828    23,258    46,307,448    (47)   (59,083,777)   (12,753,117)
Common stock issuance  for cash   -    -    117,821,672    11,782    1,128,935    -    -    1,140,717 
                                         
Common stock issuance for conversion of debt   -    -    135,812,528    13,581    766,084    -    -    779,665 
                                         
Common stock issuance for settlement of accounts payable   -    -    18,910,088    1,891    173,109    -    -    175,000 
                                         
Common stock issued at fair value for services   -    -    113,407,052    11,341    1,200,762    -    -    1,212,103 
                                         
Common stock issuance of make good shares   -    -    114,785,772    11,479    1,231,669    -    -    1,243,148 
                                         
Common stock issued for conversion of preferred stock   (3,334)        16,670,000    1,667    (1,667)   -    -    - 
                                         
Stock compensation cost   -    -    -    -    533,009    -    -    533,009 
                                         
Beneficial conversion feature   -    -    -    -    16,771    -    -    16,771 
                                         
Other comprehensive loss   -    -    -    -    -    (45)   -    (45)
                                         
Net loss for the year ended December 31, 2016   -    -    -    -    -    -    (4,145,830)   (4,145,830)
                                         
Balance at December 31, 2016   7,666   $1    749,995,940   $74,999   $51,356,120   $(92)  $(63,229,607)  $(11,798,579)

 

The accompany notes are an integral part of these audited consolidated financial statements

F-4

ORIGINCLEAR, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS

 

   Years Ended 
   December 31, 2016   December 31, 2015 
CASH FLOWS FROM OPERATING ACTIVITIES:        
Net loss  $(4,145,830)  $(11,615,066)
Adjustment to reconcile net loss to net cash (used in) operating activities          
Depreciation and amortization   45,478    22,598 
Common stock and warrants issued for services   1,212,103    1,260,521 
Stock option and warrant compensation expense   533,009    1,739,620 
Gain on net  change in valuation of derivative liability   (1,738,154)   2,856,917 
Fair value of debt financing cost   210,440    143,172 
Debt discount and original issue discount  recognized as interest expense   487,693    1,264,938 
Commitment fee   1,243,148    51,697 
Gain on sale of asset   -    (14,318)
Change in Assets (Increase) Decrease in:          
Contracts receivable   683,328    (93,466)
Cost in excess of billing   (30,864)   68,811 
Other receivable   100,000    (100,000)
Prepaid expenses   (11,651)   16,005 
Work in progress   9,281    (8,243)
Other asset   (194,698)   18,097 
Change in Liabilities Increase (Decrease) in:          
Accounts payable   306,567    652,715 
Accrued expenses   344,355    267,839 
Billing in excess of cost   (503,718)   355,117 
Deferred income   (150,000)   102,430 
           
NET CASH (USED IN) OPERATING ACTIVITIES   (1,599,513)   (3,010,616)
           
CASH FLOWS USED FROM INVESTING ACTIVITIES:          
Proceeds from sale of asset   -    9,100 
Cash from acquisition of subsidiary   -    451,431 
Purchase of fixed assets   (10,133)   (113,688)
           
CASH (USED IN) PROVIDED BY INVESTING ACTIVITIES   (10,133)   346,843 
           
CASH FLOWS FROM FINANCING ACTIVITIES:          
Proceeds from convertible promissory notes   125,000    1,815,000 
Proceeds for issuance of common stock   1,140,717    1,345,731 
           
NET CASH PROVIDED BY FINANCING ACTIVITIES   1,265,717    3,160,731 
           
Foreign currency effect on cash flow   (45)   (47)
           
NET (DECREASE) INCREASE IN CASH   (343,974)   496,911 
           
CASH BEGINNING OF YEAR   695,295    198,384 
           
CASH END OF YEAR  $351,321   $695,295 
           
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION          
Interest paid  $2,199   $878 
Taxes paid  $-   $- 
           
SUPPLEMENTAL DISCLOSURES OF NON CASH TRANSACTIONS          
Conversion of accounts payable into a convertible note  $430,896   $432,048 
Beneficial conversion feature on convertible note  $16,771   $- 
Common stock issued for supplemental shares  $1,243,148   $51,696 
Common stock issued for conversion of debt and accrued interest  $779,665   $1,456,973 
Common stock issued for settlement of accounts payable  $175,000   $- 
Preferred stock issued for acquisition of PWT  $-   $1,500,000 

 

The accompanying notes are an integral part of these audited consolidated financial statements

F-5

 ORIGINCLEAR, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

DECEMBER 31, 2016 AND 2015

 

1.    ORGANIZATION AND LINE OF BUSINESS

 

Organization

OriginClear, Inc. (the "Company") was incorporated in the state of Nevada on June 1, 2007. The Company, based in Los Angeles, California, began operations on June 1, 2007 to develop and market a renewable oil technology. The Company began its’ planned principle operations in December, 2010, at which time it exited the development stage.

 

In December 2014, the Company formed a wholly owned subsidiary, OriginClear (HK) Company Limited (“OCHK”), formerly OriginOil (HK) Limited, in Hong Kong, China. The Company granted OCHK a master license for the People’s Republic of China. In turn, OCHK is expected to license regional joint ventures for frack and waste treatment. A research and manufacturing center is also planned. As of December 31, 2016, OCHK has limited assets and operations. 

 

On October 1, 2015, the Company completed the acquisition of 100% of the total issued and outstanding stock of Progressive Water Treatment, Inc. (“PWT”) and is included in these consolidated financial statements as a wholly owned subsidiary. See Note 3. 

 

Line of Business

OriginClear is a leading provider of water treatment solutions and the developer of a breakthrough water cleanup technology.  The Company’s technology integrates easily with other industry processes and can be embedded into larger systems through licensing and joint ventures. Through the acquisition of Progressive Water Treatment Inc., the Company is primarily engaged in providing water treatment systems and services for a wide variety of applications and component sales.

 

Going Concern

The accompanying 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 financial statements do not reflect any adjustments that might result if the Company is unable to continue as a going concern. During the year ended December 31, 2016, the Company did not generate significant revenue, incurred a net loss of $4,145,830 and used cash in operations of $1,599,513.  As of December 31, 2016, the Company had a working capital deficiency of $11,056,570 and a shareholders’ deficit of $11,798,579.   These factors, among others raise substantial doubt about the Company’s ability to continue as a going concern.  Our independent auditors, in their report on our audited financial statements for the year ended December 31, 2016 expressed substantial doubt about our ability to continue as a going concern.

 

The accompanying consolidated financial statements have been prepared in conformity with U.S. GAAP, which contemplates continuation of the Company as a going concern and the realization of assets and satisfaction of liabilities in the normal course of business. The carrying amounts of assets and liabilities presented in the financial statements do not necessarily purport to represent realizable or settlement values. The consolidated financial statements do not include any adjustment that might result from the outcome of this uncertainty.

 

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, achieving a level of profitable operations and receiving additional cash infusions. During the year ended December 31, 2016, the Company obtained funds from the issuance of convertible note agreements and from sales of its common stock. The Company also generated revenue of $5,071,095 and has standing purchase orders and open invoices with customers which will provide funds for operations. Management believes this funding will continue from its’ current investors and from new investors. Management believes the existing shareholders, the prospective new investors and revenue from operations 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 stock holders, 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., and OriginClear (HK) Company, Ltd. All material intercompany transactions have been eliminated upon consolidation of these entities.

 

Cash and Cash Equivalent

The Company considers all highly liquid investments with an original maturity of three months or less to be cash equivalents.

 

Use of Estimates

The preparation of the 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, and common stock issued for services, among other items. Actual results could differ from these estimates.

F-6

 

ORIGINCLEAR, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

DECEMBER 31, 2016 AND 2015

 

2.    SUMMARY OF SIGNIFICANT ACCOUNTING POLICES (Continued)

 

Concentration Risk

Cash includes amounts deposited in financial institutions in excess of insurable Federal Deposit Insurance Company (FDIC) limits. At times throughout the year, the Company may maintain cash balances in certain bank accounts in excess of FDIC limits. As of December 31, 2016, the cash balance in excess of the FDIC limits was $1,327. The Company has not experienced any losses in such accounts and believes it is not exposed to any significant credit risk in these accounts.

 

Loss per Share Calculations

Basic loss per share calculations are computed by dividing income (loss) available to common shareholders by the weighted-average number of common shares available. Diluted earnings per share is computed similar to basic earnings per share except that the denominator is increased to include securities or other contracts to issue common stock that would have been outstanding if the potential common shares had been issued and if the additional common shares were dilutive. The Company’s diluted loss per share is the same as the basic loss per share for the years ended December 31, 2016 and 2015, respectively, as the inclusion of any potential shares would have had an anti-dilutive effect due to the Company generating a loss.

 

     For the Years Ended 
     2016   2015 
  (Loss) to common shareholders (Numerator)  $(4,145,830)  $(11,615,066)
             
  Basic and diluted weighted average number of common shares outstanding denominator   503,413,873    159,667,650 

 

The Company has excluded 129,412,311 stock options, 17,710,925 warrants, and the shares issuable from convertible debt of $4,152,068 and shares issuable from convertible preferred stock for the year ended December 31, 2016 because their impact on the loss per share is anti-dilutive.

 

The Company has excluded 119,404,644 stock options, 23,297,108 warrants, and the shares issuable from convertible debt of $4,440,172 and shares issuable from convertible preferred stock for the for the year ended December 31, 2015 because their impact on the loss per share is anti-dilutive.

 

Work-in-Process

The Company recognizes as an asset the accumulated costs for work-in-process on projects expected to be delivered to customers. Work in Process includes the cost price of materials and labor related to the construction of equipment to be sold to customers.

 

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. The cost in excess of billings for the years ending December 31, 2016 and 2015, were $47,612 and $16,748, respectively. The billing in excess of cost was for the years ending December 31, 2016 and 2015, was $0 and $503,718, respectively.

 

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.

 

F-7

 

ORIGINCLEAR, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

DECEMBER 31, 2016 AND 2015

 

2.    SUMMARY OF SIGNIFICANT ACCOUNTING POLICES (Continued)

 

Percentage of completion (Continued)

Contract receivables are recorded on contracts for amounts currently due based upon progress billings, as well as retention, which are collectible upon completion of the contracts. Accounts payable to material suppliers and subcontractors are recorded for amounts currently due based upon work completed or materials received, as are retention due subcontractors, which are payable upon completion of the contract. General and administrative expenses are charged to operations as incurred and are not allocated to contract costs. 

Contract Receivable

The Company bills its customers in accordance with contractual agreements. The agreements generally require billing to be on a progressive basis as work is completed. Credit is extended based on evaluation of clients financial condition and collateral is not required. The Company maintains an allowance for doubtful accounts for estimated losses that may arise if any customer is unable to make required payments. Management performs a quantitative and qualitative review of the receivables past due from customers on a monthly basis. The Company records an allowance against uncollectible items for each customer after all reasonable means of collection have been exhausted, and the potential for recovery is considered remote. The allowance for doubtful accounts was approximately $50,000 as of December 31, 2016 and 2015, respectively. The net contract receivable balance was $382,895 and $1,066,223 at December 31, 2016 and 2015, respectively.

 

Indefinite Lived Intangibles and Goodwill Assets

The Company accounts for business combinations under the acquisition method of accounting in accordance with ASC 805, “Business Combinations,” where the total purchase price is allocated to the tangible and identified intangible assets acquired and liabilities assumed based on their estimated fair values. The purchase price is allocated using the information currently available, and may be adjusted, up to one year from acquisition date, after obtaining more information regarding, among other things, asset valuations, liabilities assumed and revisions to preliminary estimates. The purchase price in excess of the fair value of the tangible and identified intangible assets acquired less liabilities assumed is recognized as goodwill. 

The Company tests for indefinite lived intangibles and goodwill impairment in the fourth quarter of each year and whenever events or circumstances indicate that the carrying amount of the asset exceeds its fair value and may not be recoverable. In accordance with its policies, the Company performed a qualitative assessment of indefinite lived intangibles and goodwill at December 31, 2016 and 2015, and determined there was no impairment of indefinite lived intangibles and goodwill. 

Research and Development

Research and development costs are expensed as incurred. Total research and development costs were $502,209 and $814,014 for the years ended December 31, 2016 and 2015, respectively. 

Advertising Costs

The Company expenses the cost of advertising and promotional materials when incurred. The advertising costs were $189,429 and $164,463 for the years ended December 31, 2016 and 2015, respectively. 

Property and Equipment

Property and equipment are stated at cost. Gain or loss is recognized upon disposal of property and equipment, and the asset and related accumulated depreciation are removed from the accounts. Expenditures for maintenance and repairs are charged to expense as incurred, while expenditures for addition and betterment are capitalized. Furniture and equipment are depreciated on the straight-line method and include the following categories: 

  Estimated Life     
  Machinery and equipment   5-10  years 
  Furniture, fixtures and computer equipment   5-7  years 
  Vehicles   3-5  years 
  Leasehold improvements   2-5  years 

 

Long-lived assets held and used by the Company are reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. In the event that facts and circumstances indicate that the cost of any long-lived assets may be impaired, an evaluation of recoverability would be performed following generally accepted accounting principles. 

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.

 

F-8

 

ORIGINCLEAR, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

DECEMBER 31, 2016 AND 2015

 

2.    SUMMARY OF SIGNIFICANT ACCOUNTING POLICES (Continued)

 

Accounting for Derivatives

The Company evaluates all of its financial instruments to determine if such instruments are derivatives or contain features that qualify as embedded derivatives. For derivative financial instruments that are accounted for as liabilities, the derivative instrument is initially recorded at its fair value and is then re-valued at each reporting date, with changes in the fair value reported in the statements of operations. For stock-based derivative financial instruments, the Company uses a probability weighted average series Black-Scholes-Merton option pricing models to value the derivative instruments at inception and on subsequent valuation dates.

 

The classification of derivative instruments, including whether such instruments should be recorded as liabilities or as equity, is evaluated at the end of each reporting period. Derivative instrument liabilities are classified in the balance sheet as current or non-current based on whether or not net-cash settlement of the derivative instrument could be required within 12 months of the balance sheet date.

 

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 December 31, 2016, the balances reported for cash, contract receivables, cost in excess of billing, prepaid expenses, accounts payable, billing in excess of cost, and accrued expenses approximate the fair value because of their short maturities.

 

We adopted ASC Topic 820 for financial instruments measured as fair value on a recurring basis. ASC Topic 820 defines fair value, established a framework for measuring fair value in accordance with accounting principles generally accepted in the United States and expands disclosures about fair value measurements.

 

Fair value is defined as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. ASC Topic 820 established a three-tier fair value hierarchy which prioritizes the inputs used in measuring fair value. The hierarchy gives the highest priority to unadjusted quoted prices in active markets for identical assets or liabilities (level 1 measurements) and the lowest priority to unobservable inputs (level 3 measurements). These tiers include:

 

●       Level 1, defined as observable inputs such as quoted prices for identical instruments in active markets;
   
●       Level 2, defined as inputs other than quoted prices in active markets that are either directly or indirectly observable such as quoted prices for similar instruments in active markets or quoted prices for identical or similar instruments in markets that are not active; and
   

Level 3, defined as unobservable inputs in which little or no market data exists, therefore requiring an entity to develop its own assumptions, such as valuations derived from valuation techniques in which one or more significant inputs or significant value drivers are unobservable.

 

The following table presents certain investments and liabilities of the Company’s financial assets 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 December 31, 2016 and 2015.

 

     Total   (Level 1)   (Level 2)   (Level 3) 
                   
  Derivative Liability, December 31, 2016  $8,702,083   $    -   $    -   $8,702,083 
  Derivative Liability, December 31, 2015  $9,317,475   $-   $-   $9,317,475 

 

The following is a reconciliation of the derivative liability for which level 3 inputs were used in determining the approximate fair value:

 

  Balance as of January 1, 2015  $4,052,401 
  Fair Value of derivative liabilities issued   2,408,157 
  Loss on conversion of debt and change in derivative liability   2,856,917 
  Balance as of December 31, 2015  $9,317,475 
  Fair Value of derivative liabilities issued   1,122,762 
  Gain on conversion of debt and change in derivative liability   (1,738,154)
  Balance as of December 31, 2016  $8,702,083 

 

F-9

 

ORIGINCLEAR, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

DECEMBER 31, 2016 AND 2015

 

2.    SUMMARY OF SIGNIFICANT ACCOUNTING POLICES (Continued)

 

Fair Value of Financial Instruments (Continued)

For purpose of determining the fair market value of the derivative liability, the Company used Binomial lattice formula valuation model. The significant assumptions used in the Binomial lattice formula valuation of the derivative are as follows:

 

      12/31/2016    12/31/2015 
  Risk free interest rate   .01% - 1.02%   .14% - 1.31%
  Stock volatility factor   4.72% - 189.09%   35.80% - 103.83%
  Weighted average expected option life   6 months - 5 years    6 months - 2.75 year 
  Expected dividend yield   None     None  

 

Segment Reporting

The Company’s business currently operates in one segment based upon the Company’s organizational structure and the way in which the operations are managed and evaluated.

 

Recently Issued Accounting Pronouncements

In February 2016, the FASB issued ASU No. 2016-2, which creates ASC Topic 842, “Leases.” This update increases transparency and comparability among organizations by recognizing lease assets and lease liabilities on the balance sheet and disclosing key information about leasing arrangements. This guidance is effective for interim and annual reporting periods beginning after December 15, 2018. We are evaluating what impact, if any, the adoption of this guidance will have on our financial condition, results of operations, cash flows or financial disclosures.

 

In March 2016, the FASB issued ASU No. 2016-9, which amends ASC Topic 718, “Compensation – Stock Compensation.” This amendment simplifies several aspects of the accounting for share-based payment transactions, including the income tax consequences, classification of awards as either equity or liabilities and classification on the statement of cash flows. This guidance is effective for interim and annual reporting periods beginning after December 15, 2016. We are evaluating what impact, if any, the adoption of this guidance will have on our financial condition, results of operations, cash flows or financial disclosures.

 

In August 2016, the FASB issued ASU No. 2016-15 which amends ASC Topic 230, “Classification of Certain Cash Receipts and Cash Payments.” The amendments in this Update address eight specific cash flow issues with the objective of reducing the existing diversity in practice. The update outlines the classification of specific transactions as either cash inflows or outflows from financing activities, operating activities, investing activities or non-cash activities. This guidance is effective for interim and annual reporting periods beginning after December 15, 2017. We are evaluating what impact, if any, the adoption of this guidance will have on our financial condition, results of operations, cash flows or financial disclosures.

 

Management reviewed currently issued pronouncements during the year ended December 31, 2016, and does not believe that any other recently issued, but not yet effective, accounting standards, if currently adopted, would have a material effect on the accompanying financial statements.

 

3.    BUSINESS ACQUISITION