Attached files

file filename
EX-3.17 - SERIES D CERTIFICATE OF DESIGNATION OF ORIGINCLEAR, INC. FILED WITH THE SECRETAR - ORIGINCLEAR, INC.f10k2017ex3-17_originclea.htm
EX-32 - CERTIFICATION - ORIGINCLEAR, INC.f10k2017ex32_originclea.htm
EX-31 - CERTIFICATION - ORIGINCLEAR, INC.f10k2017ex31_originclea.htm
EX-21.1 - SUBSIDIARIES OF THE REGISTRANT - ORIGINCLEAR, INC.f10k2017ex21-1_originclea.htm
EX-10.7 - FORM OF SUBSCRIPTION AGREEMENT - ORIGINCLEAR, INC.f10k2017ex10-7_originclea.htm
EX-3.18 - SERIES D-1 CERTIFICATE OF DESIGNATION OF ORIGINCLEAR, INC. FILED WITH THE SECRET - ORIGINCLEAR, INC.f10k2017ex3-18_originclea.htm
EX-3.16 - CERTIFICATE OF AMENDMENT OF ORIGINCLEAR, INC. FILED WITH THE SECRETARY OF STATE - ORIGINCLEAR, INC.f10k2017ex3-16_originclea.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, 2017

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 ☒
  Emerging Growth Company ☐

 

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐

 

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 $5,517,000 based upon the closing sales price of the registrant’s common stock on June 30, 2017 of $0.12 per share.

 

At April 13, 2018, 135,987,180 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 15
Item 1B. Unresolved Staff Comments 23
Item 2. Properties 23
Item 3. Legal Proceedings 23
Item 4. Mine Safety Disclosures 23
     
  PART II  
Item 5. Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities 24
Item 6. Selected Financial Data 25
Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations 25
Item 7A. Quantitative and Qualitative Disclosures About Market Risk 30
Item 8. Financial Statements and Supplementary Data 30
Item 9. Changes in and Disagreements With Accountants on Accounting and Financial Disclosure 31
Item 9A. Controls and Procedures 31
Item 9B. Other Information 31
     
  PART III  
Item 10. Directors, Executive Officers and Corporate Governance 33
Item 11. Executive Compensation 36
Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters 38
Item 13. Certain Relationships and Related Transactions, and Director Independence 40
Item 14. Principal Accountant Fees and Services 41
Item 15. Exhibits, Financial Statement Schedules 42
   
SIGNATURES 43

 

 

 

 

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)

 

 1 

 

 

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

 

Our mission is to provide expertise, technology, and capital to help make clean water available for all. Specifically, we have the following initiatives:

 

1.We license our technology worldwide to treat heavily polluted waters and also to remove harmful micro-contaminants from drinking water, using minimal energy, chemicals, and materials.

 

2.We are building a network of customer-facing water service companies to expand our global market presence and our technical expertise.

 

3.In our latest proprietary development as a water technology company, we have conceptualized our blockchain-based WaterChain™ initiative to fund next-generation water recycling systems that can propel the world’s water supply forward into a cleaner future. We have created a concept document and have recruited an initial team of advisors. We received initial technical advice and we are now raising additional funds to architect and develop the WaterChain program. It is very likely that the initial WaterChain vision will change dramatically as we develop the program. We have not defined the final nature of any coins, tokens or other instruments, and we may not be able to raise the capital needed to execute on this concept.

 

Water is our most valuable resource, and the mission of OriginClear 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.

 

 2 

 

 

Progressive Water Treatment Inc.

 

On October 1, 2015, OriginClear announced it had acquired 100 percent of Dallas-based Progressive Water Treatment Inc. (“PWT”), a 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 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 the Company’s newly designated Series B Preferred Stock.

 

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 17, 2017, we announced that PWT completed its third major power plant project in 2016 which included the installation and startup of a $2 million boiler feedwater system for a power plant operated by a major Midwestern public utility.

 

On October 31, 2017, we announced that PWT more than doubled its revenue from Q2 to Q3 2017 and our initial guidance ahead of quarterly filings indicated revenues on growth trend.

 

On February 23, 2018, we announced that, after doubling from Q2 to Q3 2017, PWT maintained its performance in Q4 2017.

 

PWT had four major customers for the year ended December 31, 2017. The customers represented 54.5% of billings for the year ending December 31, 2017.

 

OriginClear is currently in discussions for additional, accretive acquisitions of companies specializing in complementary markets and applications. However, no assurance can be given that the Company will complete these acquisitions.

 

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.

 

 3 

 

 

The Technology

 

OriginClear is the proprietary developer of 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.

 

In March of 2016, OriginClear announced that it had successfully developed and proved Advanced Oxidation for its breakthrough water cleanup system, 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.

 

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 2017, OriginClear accomplished the following milestones in the Technology division:

 

In March 2017, OriginClear entered into a license agreement with a Spanish industrial group, Montajes Longares and its subsidiary, Depuporc SL (“Depuporc”). Depuporc has developed an integrated waste water treatment system targeting animal farming and more particularly pig farms. Spain is Europe’s largest pig producing country. OriginClear’s technology, EWS:AOx, will be a core component of Depuporc’s patented system.

 

Also in March 2017, OriginClear entered into a master research agreement with Florida Atlantic University (FAU) in Boca Raton, Florida. This partnership establishes a cooperative framework for further scientific research and validation projects pertaining to OriginClear’s technology, EWS:AOx, when applied to landfill leachate treatment.

 

 4 

 

 

In April and May 2017, OriginClear demonstrated its technology’s efficiency for Produced Water treatment at Sinopec Group’s shale gas site in China’s Shandong Province. Sinopec Group is Asia's largest oil and gas company, and the second largest in the world, as listed in the Fortune Global 500.

 

In July 2017, OriginClear entered India via a license agreement with Permionics Global Technologies LLP, the emerging technologies division of Permionics Membranes Pvt Ltd, a leading Indian filtration and membrane solutions provider for process, waste water recycling and water treatment.

 

From August 2017 onwards, OriginClear engaged into an internal R&D program targeting the removal of microtoxins in drinking water. The first series of tests focused on a key chemical in Roundup® glyphosate, which has been reported to be present in up to 70% of drinking water in the US. After several test rounds at the La Kretz Advanced Prototyping Center, OriginClear demonstrated real-time virtual elimination of glyphosate at concentrations of parts per billion, equivalent to the contamination level in drinking water. A summary report of the test is available at https://www.originclear.com/tech/microtoxin-reduction.

 

On September 26, 2017, OriginClear filed a provisional patent to protect a newly developed electrode configuration that significantly increases direct contact of the contaminants in water with the electrodes surface, where the strongest oxidation reactions occur. During the tests that were done on low concentration herbicides in fresh water, this new electrode design also showed ability to efficiently address low electrical conductivity water streams, thus also solving a major energy consumption issue with these types of water.

 

In December 2017, OriginClear announced a preliminary agreement with the National Superior Engineering School (ENSIL-ENSCI) of France’s University of Limoges, to validate OriginClear’s process, EWS:AOx, for extremely challenging water treatment problems such as landfill runoff and flooding from major storms and hurricanes. This partnership will provide a framework similar to the partnership with FAU, but targeting European markets.

 

WaterChain, Inc.

 

WaterChain, Inc. was incorporated in December, 2017 and is a wholly-owned subsidiary of OriginClear, Inc. OriginClear is a technology company and WaterChain is our latest invention. It is a way to raise capital for next-generation, decentralized water treatment and recycling projects all over the world.

 

An opportunity exists to create a new generation of water projects that take advantage of recent innovations in on-site water treatment systems and practices. We believe these can dramatically improve speed and costs, making it far easier to treat and recycle water. The technologies are known; creating new capital for their implementation, and potentially deploying Distributed Ledger Technology (“DLT”) or “blockchain” are new.

 

Although it is still in the early stage and there can be no assurance of success, we intend to develop and launch an Initial Coin Offering (ICO) to provide some capital for and scale up a series of advanced water treatment and recycling systems. If we are successful with our ICO, we plan to implement a Project Management Organization (PMO) to implement a transparent and fair process to select projects, technologies and practices.

 

We plan to deploy DLT within these systems as appropriate and scale up with the active involvement of the water industry to help meet the global water crisis.

 

We intend to adhere to securities law to the fullest extent possible in our ICO and related funding efforts and have retained specialized counsel to that effect. The “coin” may take any form, for example as an asset class, or as equity in OriginClear.

 

 5 

 

 

WaterChain, Inc. Recent Developments

 

In February, 2018, we announced that we had engaged London-based, The Coin Lab, to help develop the WaterChain concept, and that we had filed for patent protection on a token ecosystem for improved efficiency of transactions in the water industry.

 

Later that month, we announced that we had presented our WaterChain strategy at d10e Silicon Valley.

 

On April 13, 2018, OriginClear began conducting a private placement for the sale of up to 50,000,000 units, each consisting of (i) one share of the Company’s 0% Series D Convertible Preferred Stock (the Series D “Preferred Stock”) and (ii) one coin purchase right. The purchase price for each unit is $.02 for aggregate potential proceeds of $1,000,000, with available discounts ranging from 10% to 30% to investments above $50,000 to $250,000 or greater, respectively. The private placement is intended in part to fund the development of WaterChain. The Company may increase the offering amount to $2,000,000 at its sole discretion. This has a potential dilutive effect on the Company as follows: if every investor receives the maximum discount of 30%, then the maximum number of shares of Series D Preferred Stock can increase to over 142 million shares, convertible into shares of Common Stock. Additionally, if a future capital raising event for WaterChain does not occur, the number of shares that are granted pursuant to this offering may be multiplied by 2, causing the number of shares of Series D Preferred Stock to be issued pursuant to this offering to exceed 284 million shares convertible into shares of Common Stock.

 

Looking Ahead

 

In 2018, OriginClear hopes to achieve the following:

 

Continued growth of PWT’s revenues and profits.
One or more acquisitions of a profitable water treatment service provider.
Breakeven and profitability of OriginClear Technologies.
WaterChain ICO.
Fund and complete the first Proof of Concept (POC) water treatment system under the WaterChain funding mechanism.

 

Our Strategy

 

We currently operate three synergistic lines of business:

 

1.The OriginClear Group
2.OriginClear Technologies
3.WaterChain Inc.

The OriginClear Group

 

The OriginClear Group’s strategy is to grow incrementally by focusing on the water treatment services 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.

 

OriginClear Technologies

 

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

 

1.Algae Harvesting

 

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.

 

 6 

 

 

Algae harvesting is OriginClear’s historical activity, which also laid the technology groundwork for the company’s subsequent applications development. It started with Single Step Extraction™ (SSE). Today, SSE is the first stage in EWS and it powers our sanitation and growth optimizing applications.

 

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.

 

2.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. In the United States, an average of 7 barrels of contaminated water is generated for each 1 barrel of oil produced. Greentech Media reports that energy companies pay between $3 to $12 to dispose of each barrel of produced water. We believe OriginClear’s 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.

 

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 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.

 

Through its licensees and joint venture partners, OriginClear is making EWS available, either as a stand-alone solution or integrated with up- and downstream treatment modules, to customers such as: E&P operators, service companies, disposal well operators and water treatment companies.

 

3.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.

 

 7 

 

 

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).

 

WaterChain™: Decentralized Water Funding

 

WaterChain, Inc. is a wholly owned subsidiary of the Company.

 

As an organization, we want to create cleaner water for the world, and often the biggest hurdles are not related to our ability to actually clean water, but instead to finance, business, and regulation.

 

We intend to partner with some of the brightest minds across the blockchain community and the water industry, to develop an entirely new funding mechanism and set of accompanying technologies that will propel the world’s water supply forward into a cleaner future.

 

Speeding up Water

 

The global water services industry is on track to become a trillion-dollar industry by 2020, and experts agree that “water is the oil of the 21st century.” By 2030, world demand for water will outstrip supply by 40 percent, and close to half of the world’s population will be living in water-stressed areas (United Nations Environment Programme report, Green Economy, March 21, 2016).

 

Only one country in the world recycles more than 20% of its water, while the US itself only recycles 1% (Fluence, February 15, 2017). The world’s clean water crisis will create both a financial crisis and global dislocation.

 

Recent droughts have caused water prices to spike in the double digits. “Conservation surcharges” could easily add on 20% more cost, and these coming water scarcities could dramatically affect many businesses and economies.

 

The humanitarian issue goes far beyond the problem of business disruption. Nearly all sewage is never treated, and more people die from unsafe water annually than from all forms of violence, including war. As large as it is, the global water industry is still well short of its potential scope.

 

Growing at just 4% annually, the water industry isn’t ramping up fast enough to meet the coming crisis. The biggest issue is our aging infrastructure, which now needs more than quarter trillion dollars to update in the US alone.

 

Because our infrastructure is not being modernized fast enough, municipalities are starting to refuse untreated water, in turn requiring industrial, commercial, agricultural, and large residential users to treat their own water.

 

Since treating water is not their core business, the users outsource the problem to local water service providers and avoid capital expense by paying only for water when it is cleaned. This pay-for-performance model is a risky proposition for smaller service companies and their financiers, and as a result the outsourcing trend, while inevitable, is not progressing quickly enough to meet the growing demand for more water treatment.

 

Meanwhile, individuals who want to help the world meet its water crisis can often only donate to nonprofit projects, most of which are focused on providing clean water to the developing world. The average investor cannot invest in clean water projects as a means to improve the water industry and simultaneously participate in the economic upsides of those initiatives.

 

 8 

 

 

The water industry needs a 21st century platform that speeds up funding for new water treatment facilities, encourages the use of the best current and future technologies, and allows investors access to the growth potential of the water industry.

 

Decentralized Investing in Water Treatment Facilities

 

WaterChain intends to create the infrastructure, both on- and off-blockchain, with the potential to quickly increase the number of modular, connected water treatment facilities worldwide. Through an initial coin offering (ICO), we intend to offer investors the opportunity to participate in the sharing of future profits generated by water projects deployed with WaterChain capital. The “coin” or “token” may take any form, for example as an asset class, or as equity in OriginClear.

 

We intend to rapidly deploy a Proof of Concept system with the proceeds of early funding rounds. In this way, we will be demonstrating the value of next-generation water treatment systems while we develop the full WaterChain infrastructure and also complete our major capital raises.

 

Beyond the first project, capital raised from the ICO is intended to develop WaterChain technology and operational infrastructure, sustain the organization until enough Return on Investment is generated to reward investors and fund future water projects, and create an independent organization that will oversee the projects being deployed using WaterChain capital.

 

There already exists a new generation of water treatment technology. By assembling the best minds in the water treatment industry and funding them with capital raised from the crypto community, these technologies can deliver new water treatment facilities faster and at a lower cost compared to existing methods. At the same time, investors know they are helping the world to solve its growing water problem while potentially being rewarded with a share of the profits from those efforts.

 

We also intend to work with existing financing actors to leverage this capital and make the funding go further. We believe that as the asset base grows, the value of our security token will reflect this appreciated value and make further deployments possible. In addition, we plan to set up a token reserve for future expansion.

 

Our Future Vision

 

Within the current water ecosystem, there are inherent challenges with water monitoring and payments between water users, service providers, technology licensors, and investors. The industry is ready for next-generation integration, transparency, and automation, and we believe we will be well positioned to develop and fund a frictionless and high-speed ecosystem for water treatment.

 

We intend to implement Distributed Ledger Technology (DLT) in the water treatment projects themselves. If a utility token were used in this context, it would have no value as an investment vehicle and would be deployed only to manage, execute, and settle smart contracts on the WaterChain water treatment and recycling project platform.

 

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.

 

 9 

 

 

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.

 

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).

 

 10 

 

 

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.

 

The Payment Industry

 

The use of capital for water treatment projects, and the optimization of the water industry using DLT and the blockchain are still very early concepts. We are aware of blockchain initiatives relating narrowly to water rights and water sensing devices; and the H2O ICO “ticker” is for HydroMiner, “a crypto currency mining company using green energy drawn from hydro power stations in the Alpine region of Europe.” None of these are in the same category as WaterChain.

 

In short, we are not aware of any other effort to develop capital for full water systems, nor to create efficiencies for the water industry as a whole using distributed applications on or off blockchain.

 

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.

 

 11 

 

 

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 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 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 October 19, 2011, we filed a utility patent application with the Japanese Patent Office 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 of the Use Thereof”. The inventors listed on the patent application are Nicholas Eckelberry, Michael Green and Scott Fraser. On June 7, 2013, the patent was issued with the number 5284536.
     
  On October 19, 2011, we filed a utility patent application with the Mexican Patent Office 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 of the Use Thereof”. The inventors listed on the patent application are Nicholas Eckelberry, Michael Green and Scott Fraser. On April 1, 2015, the patent was issued with the number 329063.
     
  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.
     
  On November 11, 2011, we filed a trademark application with the USPTO to protect the intellectual property rights for our prior company logo “OriginOil”. On February 11, 2013 the trademark was issued with Certificate Number 4,284,800.
     
  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 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.

 

 12 

 

 

  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 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 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 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 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.
     
  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 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 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 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 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.

 

 13 

 

 

  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.      
     
  On September 5, 2017, we filed a provisional patent application with the USPTO to protect our intellectual property rights for “Advanced Oxidation Water Treatment Modules”. The inventor listed on the patent application is Jean-Louis Kindler. We are listed as the assignee.

 

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”.

 

 14 

 

 

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, 2017 and 2016, we invested $197,119 and $502,209, respectively, on research and development of our technologies. Research and development costs include activities related to development and innovations in the core 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 April 15, 2018, we have 22 full-time employees. We have not experienced any work stoppages and we consider relations with our employees to be good.

 

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.

 

 15 

 

 

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, 2017 and 2016, we had working capital (deficit) of $(7,194,220) and $(11,056,570), respectively, and shareholders' (deficit) of $(9,831,696) and $(11,798,579), respectively. For the years ended December 31, 2017 and 2016, we incurred net losses of $(5,231,805) and $(4,145,830). As of December 31, 2017, we had an aggregate accumulated deficit of $68,461,412. 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, 2017 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.

 

We have incurred substantial indebtedness.

 

As of March 31, 2018, we have convertible notes with outstanding principal and accrued but unpaid interest of approximately $4,885,250. All such debt is payable within the following twelve to thirty six 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;

 

 16 

 

 

  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.

 

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 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 EWS:AOxtechnology 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.

 

 17 

 

 

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 only hold five issued patents, 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.

 

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 crude oil prices return to previously low levels, it may become difficult or impossible to sell or license systems to the oil and gas industry. Such events and other deflationary events may impact our business materially.

 

 18 

 

 

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 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.

 

A significant percentage of our voting capital stock is held by our directors and executive officers, constituting a supermajority vote, and which allows such holders to take corporate actions such as amendment of certain provisions of the articles of incorporation and bylaws.

 

On March 15, 2017, the Company filed a Certificate of Designation for its Series C Preferred Stock with the Secretary of State of Nevada 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.

 

As of December 31, 2017, all shares of Series C Preferred Stock are held by our chief executive officer, T. Riggs Eckelberry. This means that our chief executive officer is the holder of 51% of the total vote on all shareholder matters of the Company presented for a shareholder vote. This may prevent or frustrate attempts by stockholders to change the board of directors or current management and could make a third-party acquisition of the Company difficult which could limit the price that investors might be willing to pay in the future for shares of the Company’s common stock.

 

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.

 

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.

 

 19 

 

 

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.

 

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.

 

 20 

 

 

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.

 

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.

 

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, 2017 from a low of $0.02 to a high of $0.29 on the OTCQB. The trading price of our common stock on the OTCQB 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.

 

 21 

 

 

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 of 1933, as amended (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 31, 2018, Mr. Eckelberry, our Chief Executive Officer and Chairman, beneficially owns 5,164,563 shares of our common stock (including 1,714,286 and 21,705 shares of our common stock issuable upon the exercise of stock options at a price of $1.31 and $15.05 per share, respectively). 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.

 

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 Securities and Exchange Commission (“SEC”). 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.

 

 22 

 

 

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, 2017, 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.

 

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 $3,925. 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.

 

 23 

 

 

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.

 

On April 7, 2017, the Company filed a certificate of amendment to its articles of incorporation with the State of Nevada effectuating a reverse split of the Company’s common stock at a ratio of 1 for 35 (the “Reverse Split”). The Reverse Split became effective in the State of Nevada on April 12, 2017. All share amounts included herein have been adjusted based on take in account the Reverse Split.

 

  

Fiscal Year 2017

 
   High   Low 
First Quarter  $0.29    0.12 
Second Quarter  $0.27    0.09 
Third Quarter  $0.14    0.03 
Fourth Quarter  $0.05    0.02 

 

   Fiscal Year 2016 
   High   Low 
First Quarter  $1.05    0.60 
Second Quarter  $0.84    0.28 
Third Quarter  $0.53    0.27 
Fourth Quarter  $0.65    0.17 

 

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 31, 2018, we had approximately 483 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.

 

 24 

 

 

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, 2017 other than those transactions previously reported to the SEC on our quarterly reports on Form 10-Q and current reports on Form 8-K.

 

Between March 21, 2018 and March 30, 2018, the Company issued to consultants an aggregate of 3,712,068 shares of the Company’s common stock in lieu of cash considerations.

 

In connection with certain one-time make good agreements, on March 30, 2018, the Company issued an aggregate of 762,093 shares of its common stock to certain holders of its common stock.

 

On April 13, 2018, the Company issued to two members of the Board of Directors an aggregate of 400,000 shares of the Company’s common stock for services in lieu of cash consideration.

 

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

 

Purchases of Equity Securities by the Issuer and Affiliated Purchasers

 

None.

 

ITEM 6. SELECTED FINANCIAL DATA.

 

N/A

 

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

 

Our mission is to provide expertise, technology, and capital to help make clean water available for all. Specifically, we have the following initiatives:

 

We license our breakthrough technology worldwide to treat heavily polluted waters and also to remove harmful micro-contaminants from drinking water, using minimal energy, chemicals, and materials.

 

We are building a network of customer facing water service companies to expand our global market presence and our technical expertise.

 

In our latest proprietary development as a water technology company, we have conceptualized our blockchain-based WaterChain™ initiative to fund next-generation water recycling systems that can propel the world’s water supply forward into a cleaner future. We have created a concept document and have recruited an initial team of advisors. We received initial technical advice and we are now raising additional funds to architect and develop the WaterChain program. It is very likely that the initial WaterChain vision will change dramatically as we develop the program. We have not defined the final nature of any coins, tokens or other instruments, and we may not be able to raise the capital needed to execute on this concept.

 

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

 

 25 

 

 

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 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, or EWS. University laboratory tests have shown that 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.

 

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.

 

As of December 2017, the company has active licensees in Malaysia, Thailand, India, France, Spain as well as the US and Brazil for the Americas.

 

 26 

 

 

WaterChain, Inc.

 

WaterChain, Inc. was incorporated in December, 2017 and is a wholly-owned subsidiary of OriginClear, Inc. OriginClear is a technology company, and WaterChain is our latest invention. It is a way to raise capital for next-generation, decentralized water treatment and recycling projects all over the world.

 

An opportunity exists to create a new generation of water projects that use only the latest innovations in systems and practices. These can dramatically improve speed and costs, making it far easier to recycle water. The technologies are known; creating new capital for their implementation is new.

 

We intend to launch an Initial Coin Offering (ICO) to capitalize and rapidly scale up a series of world-class water treatment and recycling systems that return profits to investors, although there can be no assurance of this. We plan to implement a Project Management Organization (PMO) to implement a transparent and fair process to select projects, technologies and practices.

 

We plan to deploy Distributed Ledger Technology (DLT) within these systems as appropriate and scale up rapidly with the active involvement of the water industry to help meet the global water crisis.

 

We intend to adhere to securities law to the fullest extent possible in our ICO and related funding efforts and have retained specialized counsel to that effect. The “coin” may take any form, for example as an asset class, or as equity in OriginClear.

 

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.

 

 27 

 

 

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, 2017, 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, 2017, as disclosed in the Notes to the financial statements included in this report.

 

Results of Operations for the years ended December 31, 2017 and 2016.

 

   Year Ended 
   December 31,
2017
   December 31,
2016
 
Revenue  $3,355,632   $5,071,095 
Cost Of Goods Sold   2,705,771    3,589,165 
Operating Expenses, Depreciation and Amortization   5,261,770    5,071,644 
           
Loss from Operations before Other Income/(Expense)   (4,611,909)   (3,589,714)
           
Other Income/(Expense)   (619,896)   (556,116)
           
Net Loss  $(5,231,805)  $(4,145,830)

  

Revenue and Cost of Sales

 

Revenue for the year ended December 31, 2017 and 2016 was $3,355,632 and $5,071,095, respectively. Cost of sales for the year ended December 31, 2017 and 2016, was $2,705,771 and $3,589,165, respectively.

 

Operating Expenses

 

Selling and Marketing Expenses

 

Selling and Marketing (“S&M”) expenses for the years ended December 31, 2017 and 2016, were $2,503,833 and $1,849,639, respectively, which included full year activity from PWT and OriginClear Technologies (Hong Kong) subsidiaries.

 

General Administrative Expenses

 

General administrative (“G&A”) expenses for the years ended December 31, 2017 and 2016, were $2,508,264 and $2,674,318, respectively, which included full year activity from PWT and OriginClear (Technologies) Hong Kong subsidiaries.

 

Research and Development Cost

 

Research and development (“R&D”) costs decreased by $305,090 to $197,119 for the year ended December 31, 2017, compared to $502,209 for the year ended December 31, 2016. 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.

 

 28 

 

 

Other Income and Expenses

 

Other income and (expenses) decreased by $63,780 to $(619,896) for the year ended December 31, 2017, compared to $(556,116) for the year ended December 31, 2016. The decrease was the result of a decrease in interest expense of $114,726, which includes non-cash amortization of debt discount of $487,693, with offset by an increase in non-cash accounts associated with the fair value of the derivatives in the amount of $807,067, an increase in other income of $344, increase in goodwill impairment of $682,145, and an increase in commitment fees of $303,772.

 

Net Loss

 

Our net loss increased by $1,085,975 to $5,231,805 for the year ended December 31, 2017, compared to $4,145,830 for the year ended December 31, 2016. The majority of the increase in net loss was due primarily to a decrease in revenue. 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, 2017, we incurred a net loss of $5,231,805 and cash used in operations of $1,765,627. As of December 31, 2017, we had a working capital deficiency of $7,194,220 and a shareholders’ deficit of $9,831,696. 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, 2017 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, 2017, and have standing purchase orders and open invoices with customers and we are pursuing various financing alternatives to fund the Company’s operations so it can continue as a going concern in the medium to long term. Management believes this funding will continue from our current investors and has also obtained funding from new investors. There can be no assurance that such funding will be available to the Company in the amount required at any time or, if available, that it can be obtained on terms satisfactory to the Company. Management believes the existing shareholders, the prospective new investors and current 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, 2017 and December 31, 2016, we had cash of $439,822 and $351,321, respectively and working capital deficit of $7,194,220 and $11,056,570, respectively. The decrease in working capital deficit was due primarily to a decrease in work in progress, and non-cash derivative liabilities, with an increase in contracts receivable, cost in excess of billing, inventory, prepaid expenses, accounts payable, accrued expenses, billings in excess of cost, deferred income, loan payable, and convertible notes.

 

During the year ended December 31, 2017, we raised an aggregate of $225,000 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 $(1,767,627) for the year ended December 31, 2017, compared to $(1,599,513) for the year ended December 31, 2016. The increase of $168,114 in cash used in operating activities was due primarily to the net increase in net loss due to the overall inecrease 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 (used in) investing activities for the year ended December 31, 2017 and 2016 were $(41,270) and $(10,133), respectively. The net increase in cash provided in investing activities was due to the purchase of fixed assets in the current period.

 

 29 

 

 

Net cash flows provided by financing activities was $1,895,440 for the year ended December 31, 2017, as compared to $1,265,717 for the prior year ended December 31, 2016. The increase in cash provided by financing activities was primarily due to an increase in equity financing.

 

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.

 

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.

 

 30 

 

 

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

 

None

 

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 not effective to ensure that information required to be disclosed in reports filed under the Exchange Act, is recorded, processed, summarized and reported within the required time periods specified in the SEC’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.

 

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 year ended December 31, 2017, 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 due to small Company staff size, our principal executive officer and principal financial officer concluded that our disclosure controls and procedures were not effective 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 Exchange Act. Our management assessed the effectiveness of our internal control over financial reporting as of December 31, 2017. 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 this significant deficiency is primarily due to the continued integration of the 2015 acquisition of PWT, specifically as it 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 2018 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, 2017 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, 2017 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.

 

Increase in Authorized Shares

 

On April 13, 2018, the Company filed a certificate of amendment (the “Certificate of Amendment”) to its Articles of Incorporation, as amended, with the Secretary of State of the State of Nevada to effectuate an increase to the number of authorized shares of common stock of the Company. Pursuant to the Certificate of Amendment, the Company increased the number of authorized shares of its common stock to 2,000,000,000 from 900,000,000 and increased the number of authorized shares of all series of its preferred stock to 550,000,000 from 750,000. As a result of the increase of authorized shares of its common stock, the aggregate number of the Company’s authorized shares is 2,550,000,000. The Certificate of Amendment became effective upon filing with the State of Nevada on April 13, 2018. The increase in the number of authorized shares does not affect the shares of the Company’s stock issued and outstanding.

 

 31 

 

 

Series D Preferred Stock Certificate of Designation

 

On April 13, 2018, the Company filed a Certificate of Designation for its Series D Convertible Preferred Stock (the “Series D Preferred Stock”) with the Secretary of State of Nevada (the “Certificate of Designation”) designating 400,000,000 shares of its authorized preferred stock as Series D Preferred Stock. The shares of Series D Preferred Stock have a par value of $0.0001 per share. The shares of Series D Preferred Stock do not have a dividend rate or liquidation preference. The shares of Series D Preferred Stock do not carry any voting rights.

 

The shares of Series D Preferred Stock are convertible into the Company’s common stock at a conversion rate which shall be the greater of (A) one share of common stock and (B) the number of shares of common stock the holder of the Series D Preferred Stock would have received pursuant to each holders respective Subscription Agreement (as defined in the Certificate of Designation) if the shares of Series D Preferred Stock were priced based on the average Closing Sale Price (as defined in the Certificate of Designation) of the common stock during the three trading days prior to the date the holder requests a conversion, provided the lowest price for which an adjustment will be made is $0.005 (1/2 of one cent). In the event the Company does not conduct an Initial Coin Offering (as defined in the Certificate of Designation) within one (1) year of the Initial Issuance Date (as defined in the Certificate of Designation), the conversion rate shall be adjusted to read as follows: the greater of (A) one share of common stock and (B) the number of shares of common stock the holder of the Series D Preferred Stock would have received pursuant to each holders respective Subscription Agreement (as defined in the Certificate of Designation) if the shares of Series D Preferred Stock were priced based on the average Closing Sale Price (as defined in the Certificate of Designation) of the common stock during the three trading days prior to the date the holder requests a conversion, provided the lowest price for which an adjustment will be made is $0.01 (one cent).

 

Notwithstanding anything to the contrary set forth in the Certificate of Designation, at no time may all or a portion of the Series D Preferred Stock be converted if the number of shares of common stock to be issued pursuant to such conversion would exceed, when aggregated with all other shares of common stock owned by the holder at such time, the number of shares of common stock that would result in the holder beneficially owning (as determined in accordance with Section 13(d) of the 1934 Act and the rules thereunder) more than 4.99% of all of the common stock outstanding at such time, which amount may be increased to 9.99% at the holders discretion.

 

Series D-1 Preferred Stock Certificate of Designation

 

On April 13, 2018, the Company filed a Certificate of Designation for its Series D-1 Convertible Preferred Stock (the “Series D-1 Preferred Stock”) with the Secretary of State of Nevada designating 50,000,000 shares of its authorized preferred stock as Series D-1 Preferred Stock. The shares of Series D-1 Preferred Stock have a par value of $0.0001 per share. The shares of Series D-1 Preferred Stock do not have a dividend rate or liquidation preference. Each share of Series D-1 Preferred Stock is convertible into one share of common stock. The shares of Series D-1 Preferred Stock do not carry any voting rights.

 

At no time may all or a portion of the Series D-1 Preferred Stock be converted if the number of shares of common stock to be issued pursuant to such conversion would exceed, when aggregated with all other shares of common stock owned by the holder at such time, the number of shares of common stock that would result in the holder beneficially owning (as determined in accordance with Section 13(d) of the Exchange Act and the rules thereunder) more than 4.99% of all of the common stock outstanding at such time, which amount may be increased to 9.99% at the holders discretion.

 

Private Placement

 

On April 13, 2018, the Company began offering in a private placement (the “Offering”), units (“Units”), of the Company’s securities, with each Unit consisting of (i) one share of Series D Preferred Stock and (ii) one right to purchase future digital coins, or certain other securities, issued by the Company or WaterChain, Inc., our wholly owned subsidiary (a “Coin Purchase Right” or “CPR”). We are offering up to a maximum of 50,000,000 Units at a purchase price of $0.02 per Unit for an aggregate offering amount of $1,000,000; provided however, that the Company may increase the Offering amount to $2,000,000 at its sole discretion and without notice to the investors in the Offering.

 

Purchasers of Units will receive CPRs, which will provide holders with preferential rights to participate in a future offering to raise capital for WaterChain, our wholly-owned subsidiary. The future capital raising event for WaterChain may be conducted via the offering of “WaterChain Coins” or any other form of raising capital. There is no guarantee that we will ever conduct a capital raising event for WaterChain and thus a coin offering may never take place and “WaterChain Coins” may never be issued.

 

On April 13, 2018, we entered into a subscription agreement with a certain accredited investor pursuant to which we agreed to sell 5,000,000 Units of the Company’s securities for an aggregate purchase price of $100,000.

 

The Offering is being conducted pursuant to Rule 506(c) of Regulation D, and Regulation S, promulgated under the Securities Act and we will accept subscriptions only from “accredited investors” as defined in Rule 501 of Regulation D under the Securities Act or from “non-U.S. Persons” as defined under Rule 902 of Regulation S under the Securities Act.

 

 32 

 

 

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.

 

Name   Age   Position
T. Riggs Eckelberry   66   Chief Executive Officer, Chairman of the Board of Directors, Secretary, Treasurer, President and acting Chief Financial Officer
         
Anthony Fidaleo   59   Director
         
Jean-Louis Kindler   55   Chief Commercial Officer and Director
         
Byron Elton   63   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. As co-founder, Mr. Eckelberry brings his veteran technology management skills to the Blue Technology sector, and most recently has launched WaterChain, OriginClear’s wholly owned subsidiary. 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. From 2001 to mid-2005, he helped launch and turn around technology companies as founder and President of TechTransform, a technology consulting firm. In 2004, he was a key member of the team that commercialized YellowPages.com, resulting in its sale for $100 million to SBC/BellSouth. In 2003, he helped 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 helped to achieve a successful sale of the company to Earthweb; and he was a key member of the team that sale of venture-backed TriVida to what is now a division of ValueClick: (VCLK). During Mr. Eckelberry’s early career in the non-profit sector, he received a master’s license for oceangoing vessels. 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 companies. 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.

 

 33 

 

 

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. (“Carbon Sciences”) (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.

 

Family Relationships

 

There are no family relationships among any of our directors and executive officers.

 

Legal Proceedings

During the past ten years, none of our directors or executive officers has been:

the subject of any bankruptcy petition filed by or against any business of which such person was a general partner or executive officer either at the time of the bankruptcy or within two years prior to that time;
convicted in a criminal proceeding or is subject to a pending criminal proceeding (excluding traffic violations and other minor offenses);
subject to any order, judgment, or decree, not subsequently reversed, suspended or vacated, of any court of competent jurisdiction or any Federal or State authority, permanently or temporarily enjoining, barring, suspending or otherwise limiting his involvement in any type of business, securities or banking activities;
found by a court of competent jurisdiction (in a civil action), the Commission or the Commodity Futures Trading Commission to have violated a federal or state securities or commodities law;
the subject of, or a party to, any Federal or State judicial or administrative order, judgment, decree, or finding, not subsequently reversed, suspended or vacated, relating to an alleged violation of (a) any Federal or State securities or commodities law or regulation; (b) any law or regulation respecting financial institutions or insurance companies including, but not limited to, a temporary or permanent injunction, order of disgorgement or restitution, civil money penalty or temporary or permanent cease-and-desist order, or removal or prohibition order; or (c) any law or regulation prohibiting mail or wire fraud or fraud in connection with any business entity; or
the subject of, or a party to, any sanction or order, not subsequently reversed, suspended or vacated, of any self-regulatory organization (as defined in Section 3(a)(26) of the Exchange Act (15 U.S.C. 78c(a)(26))), any registered entity (as defined in Section 1(a)(29) of the Commodity Exchange Act (7 U.S.C. 1(a)(29))), or any equivalent exchange, association, entity or organization that has disciplinary authority over its members or persons associated with a member.

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 Capital Market, Anthony Fidaleo and Byron Elton would be considered independent directors.

 

 34 

 

 

Board of Directors Meetings and Attendance

The Board of Directors held four meetings in 2017, as well as acted by unanimous written consent.  All Board members were present at all of the meetings. We have no formal policy regarding director attendance at the annual meeting of stockholders.

 

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 two independent directors, one of whom 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.

 

 35 

 

 

ITEM 11. EXECUTIVE COMPENSATION.

 

The following table sets forth the compensation to our Chief Executive Officer and Chief Commercial Officer for the years ended 2017 and 2016:

 

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

T. Riggs Eckelberry,

Chairman of the Board, Acting CFO, President,

  2017     360,000                                               3,000        363,000  
Secretary & Treasurer and CEO   2016     322,500       40,000                                     362,500  
                                                                     
Jean Louis Kindler   2017     144,000                                                       144,000  
President, Technologies Division, Director   2016     144,000       4,500                                     148,500  

 

Outstanding Equity Awards at 2017 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, 2017.

 

    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)      21,704                   15.05   April 12, 2018                                
       142,857                   1.31  

October 6, 2020

                               
      1,571,429                   1.31  

October 6, 2020

                               
                                                                   
Jean Louis Kindler (4)(5)      142,857                   1.31  

October 6, 2020

                               
       142,857                   1.31  

October 6, 2020

                               

 

(1)   On April 12, 2013, Mr. Eckelberry was granted options to purchase 21,704 shares of our common stock which are fully vested, exercisable at $15.05 per share and expire 5 years from the date of grant.

 

 36 

 

 

(2)   On October 6, 2015, Mr. Eckelberry was granted options to purchase 142,857 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 $1.31 per share and expire 5 years from the date of grant.
(3)   On October 6, 2015, Mr. Eckelberry was granted options to purchase 1,571,429 shares of our common stock under the Company’s 2015 Equity Incentive Plan. These options are fully vested, exercisable at $1.31 per share and expire 5 years from the date of grant.
(4)   On October 6, 2015, Mr. Kindler was granted options to purchase 142,857shares 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 $1.31 per share and expire 5 years from the date of grant.
(5)   On October 6, 2015, Mr. Kindler was granted options to purchase 142,857shares of our common stock under the Company’s 2015 Equity Incentive Plan which will vest upon specific milestones being met, exercisable at $1.31 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 2017, our Chief Executive Officer did not receive any bonus payments.

 

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, 2017.

 

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)           $ 12,600                                    
Byron Elton (3)           $ 12,600                                    

 

 

(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 March 29, 2017, Mr. Fidaleo was issued 85,714 shares of our common stock.

On March 29, 2017, Mr. Elton was issued 85,714 shares of our common stock.

 

 37 

 

 

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 April 13, 2018 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 135,987,180 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 (1)  Number of
Shares
Beneficially
Owned
   Percentage
of Shares
   Percentage
of Voting Power
 
T. Riggs Eckelberry,
Chief Executive Officer, Chairman, Secretary, Treasurer, President
and acting Chief Financial Officer (2)
   5,164,563    3.8%   51%(3)
                
Jean-Louis Kindler, Director (4)   2,571,428    1.9    - 
                
Anthony Fidaleo, Director (5)   350,001    *    - 
                
Byron Elton, Director (6)   345,715    *    - 
                
Directors and executive officers as a group (4 persons) (7)   8,431,707    6.2%   51%(3)

 

* 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)

 

 

(3)

Includes (i) 3,428,572 shares of common stock issuable upon certain milestones being met, (ii) 1,714,286 shares of common stock issuable upon exercise of stock options at a price per share of $1.31 and (iii) 21,705 shares of common stock issuable upon exercise of stock options at prices per share of $15.05.

Includes 1,000 shares of Series C Preferred Stock which entitles holder to 51% of the total vote representing a super majority voting power) on all shareholder matters of the Company. The ownership of these shares is conditioned on the holder’s continued position as CEO.

(4)

 

Includes (i) 2,285,714 shares of common stock issuable upon certain milestones being met and (ii) 285,714 shares of common stock issuable upon exercise of stock options at a price per share of $1.31 per share.
(5) Includes (i) 14,286 shares of common stock issuable upon exercise of stock options at a price per share of $1.31 per share and (ii) 335,715 shares of common stock.
(6) Includes (i) 14,286 shares of common stock issuable upon exercise of stock options at a price per share of $1.31 per share and (ii) 331,429 shares of common stock.
(7) Includes (i) 5,714,286 shares of common stock issuable upon certain milestones being met, (ii) 2,028,572 shares of common stock issuable upon exercise of stock options at a price per share of $1.31, (iii) 21,705 shares of common stock issuable upon exercise of stock options at a price per share of $15.05 and (iv) 667,144 shares of common stock.

 

 38 

 

 

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 Stock 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.

 

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 shares of Series B Preferred Stock were issued to the shareholders of PWT. 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 $0.35 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.

 

 39 

 

 

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, 14,286 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, 28,571 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, 114,286 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, 4,571,429 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, 2017.

 

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   2,682,644    1.04    1,014,851 
Equity compensation plans not approved by security holders               
Total   2,682,644    1.04    1,014,851 

 

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

 

Except as set forth in Item 11 under “Executive Compensation,” since January 1, 2017 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.

 

 40 

 

 

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, 2017 and 2016 were $73,891 and $86,457, 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, 2017 and 2016.

 

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, 2017 and 2016.

 

For the fiscal years ended December 31, 2017 and 2016 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.

 

 41 

 

 

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)
3.13   Certificate of Amendment of OriginClear, Inc. filed with the Secretary of State of Nevada on April 7, 2017 (11)
3.14   Certificate of Amendment of OriginClear, Inc. filed with the Secretary of State of Nevada on June 30, 2017 (12)
3.15   Certificate of Amendment of OriginClear, Inc. filed with the Secretary of State of Nevada on December 1, 2017 (13)

3.16

 

Certificate of Amendment of OriginClear, Inc. filed with the Secretary of State of Nevada on April 13, 2018*

3.17

 

Series D Certificate of Designation of OriginClear, Inc. filed with the Secretary of State of Nevada on April 13, 2018*

3.18

  Series D-1 Certificate of Designation of OriginClear, Inc. filed with the Secretary of State of Nevada on April 13, 2018*
4.1   Form of Class A Stock Purchase Warrant (14)
4.2  

Form of Class B Stock Purchase Warrant (14)

4.3  

Form of Class C Stock Purchase Warrant (14)

10.1   Non-Statutory Stock Option Agreement dated October 6, 2015 (15)
10.2   OriginClear, Inc. 2015 Equity Incentive Plan (16)**
10.3   Amended and Restated Non-Statutory Stock Option Agreement dated October 6, 2015 between T. Riggs Eckelberry and the Company (17)***
10.4   Form of Restricted Stock Award between OriginClear, Inc. and T. Riggs Eckelberry (18)***
10.5   Form of Restricted Stock Award between OriginClear, Inc. and T. Riggs Eckelberry (19)***
10.6  

Form of Subscription Agreement (14)

10.7   Form of Subscription Agreement*
21.1   Subsidiaries of the Registrant *
31   Certification of Chief Executive Officer and
Acting Chief Financial Officer pursuant to Sec. 302 of the Sarbanes-Oxley Act of 2002 (20)*
32   Certification of Chief Executive Officer and Acting Chief Financial Officer pursuant to 18 U.S.C. SECTION 1350 (20)*
101   The following materials from OriginClear Inc.’s Annual Report on Form 10-K for the year ended December 31, 2017 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

** Management compensation plan

*** Management compensation agreement

 

(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 Quarterly Report on Form 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 Annual Report on Form 10-K filed with the SEC on March 31, 2017.
(11) Incorporated by reference to the Company’s Current Report on Form 8-K filed with the SEC on April 12, 2017.
(12) Incorporated by reference to the Company’s Current Report on Form 8-K filed with the SEC on June 30, 2017.

(13)

Incorporated by reference to the Company’s Current Report on Form 8-K filed with the SEC on December 6, 2017.

(14) Incorporated by reference to the Company’s Quarterly Report on Form 10-Q for the Quarter ended June 30, 2017 filed with the SEC on August 14, 2017.
(15) Incorporated by reference to the Company’s Quarterly Report on Form 10-Q for the Quarter ended September 30, 2015 filed with the SEC on November 16, 2015.
(16) Incorporated by reference to the Company’s Current Report on Form 8-K filed with the SEC on October 6, 2015.
(17) Incorporated by reference to the Company’s Current Report on Form 8-K filed with the SEC on January 8, 2016.
(18) Incorporated by reference to the Company’s Quarterly Report on Form 10-Q for the Quarter ended March 31, 2016 filed with the SEC on May 16, 2016.
(19) Incorporated by reference to the Company’s Quarterly Report on Form 10-Q for the Quarter ended June 30, 2016 filed with the SEC on August 15, 2016.
(20) 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.

 

 42 

 

 

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 April 17, 2018.

 

  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: April 17, 2018 By: /s/ T Riggs Eckelberry
    T Riggs Eckelberry
    Director, Chief Executive Officer and
Acting Chief Financial Officer
     
Date: April 17, 2018 By: /s/ Anthony Fidaleo
    Anthony Fidaleo
    Director
     
Date: April 17, 2018 By: /s/ Jean-Louis Kindler
    Jean-Louis Kindler
    President, Technologies Division and Director

 

Date: April 17, 2018 By: /s/ Byron Elton
    Byron Elton
    Director

 

 43 

 

 

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

 

To the Board of Directors and Shareholders

OriginClear, Inc.

 

Opinion on the Financial Statements

 

We have audited the accompanying consolidated balance sheets of OriginClear, Inc. (the "Company") as of December 31, 2017 and 2016, the related statements of operations, shareholders’ deficit, and cash flows for the years then ended, and the related notes (collectively referred to as the "financial statements"). In our opinion, the consolidated financial statements present fairly, in all material respects, the financial position of the Company as of December 31, 2017 and 2016, 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 Company’s Ability to Continue as a Going Concern

 

The accompanying consolidated financial statements have been prepared assuming that the Company will continue as a going concern.  As discussed in Note 1 to the financial statements, the Company does not generate significant revenue and has negative cash flows from operations.  This raises 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.  The financial statements do not include any adjustments that might result from the outcome of this uncertainty.

 

Basis for Opinion

 

These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on the Company's financial statements based on our audits. We are a public accounting firm registered with the Public Company Accounting Oversight Board (United States) ("PCAOB") and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.

 

We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement, whether due to error or fraud. The Company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting in accordance with the standards of the PCAOB. As part of our audits we are required to obtain an understanding of internal control over financial reporting 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 in accordance with the standards of the PCAOB.

 

Our audits included performing procedures to assess the risks of material misstatement of the financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the financial statements. We believe that our audits provide a reasonable basis for our opinion.

 

  /s/ Liggett & Webb, P.A  
  Liggett & Webb, P.A  

  

We have served as the Company’s auditor since 2014. 

 

New York, New York  
April 17, 2018  

 

 F-1 

 

 

ORIGINCLEAR, INC. AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS

 

   December 31,
2017
   December 31,
2016
 
         
ASSETS        
         
CURRENT ASSETS        
Cash  $439,822   $351,321 
Contracts receivable, less allowance for doubtful accounts of $6,996 and $50,000 respectively   490,441    382,895 
Inventory   13,614    - 
Cost in excess of billing   88,589    47,612 
Work in progress   84,157    86,085 
Prepaid expenses   61,607    42,128 
           
TOTAL CURRENT ASSETS   1,178,230    910,041 
           
NET PROPERTY AND EQUIPMENT   150,628    161,912 
           
OTHER ASSETS          
Other asset   19,538    19,538 
Goodwill   -    682,145 
Trademark   4,467    4,467 
Security deposit   3,500    3,500 
           
TOTAL OTHER ASSETS   27,505    709,650 
           
TOTAL ASSETS  $1,356,363   $1,781,603 
           
LIABILITIES AND SHAREHOLDERS' DEFICIT          
           
Current Liabilities          
Accounts payable and other payable  $827,656   $480,064 
Accrued expenses   932,092    715,281 
Billing in excess of cost   154,048    - 
Customer deposit   113,950    113,950 
Warrant reserve   20,000    20,000 
Deferred income   15,500    - 
Loans payable, current portion   11,090    - 
Derivative liabilities   5,531,183    8,702,083 
Convertible promissory notes, net of discount of $240,137 and $591,835, respectively   766,931    1,935,233 
           
Total Current Liabilities   8,372,450    11,966,611 
           
Long Term Liabilities          
Loan payable, long term portion   4,609    - 
Convertible promissory notes, net of discount of $0 and $11,429, respectively   2,811,000    1,613,571 
           
Total Long Term Liabilities   2,815,609    1,613,571 
           
Total  Liabilities   11,188,059    13,580,182 
           
SHAREHOLDERS' DEFICIT          
Preferred stock, $0.0001 par value, 750,000 shares authorized, 3,333 and 6,666 shares of Series B issued and outstanding, respectively   1    1 
1,000 shares of Series C issued and outstanding at December 31, 2017, 1,000 of Series A issued and outstanding at December 31, 2016   -    - 
Common stock, $0.0001 par value, 900,000,000 shares authorized 112,888,964 and 21,428,454 equity shares issued and outstanding, respectively   11,289    2,143 
Preferred treasury stock,1,000 and 1,000 shares outstanding, respectively   -    - 
Additional paid in capital   58,618,560    51,428,976 
Accumulated other comprehensive loss   (134)   (92)
Accumulated deficit   (68,461,412)   (63,229,607)
           
TOTAL SHAREHOLDERS' DEFICIT   (9,831,696)   (11,798,579)
           
TOTAL LIABILITIES AND SHAREHOLDERS' DEFICIT  $1,356,363   $1,781,603 

  

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, 2017 AND 2016

 

   Years Ended 
   December 31,
2017
   December 31,
2016
 
         
Sales  $3,355,632   $5,071,095 
           
Cost of Goods Sold   2,705,771    3,589,165 
           
Gross Profit   649,861    1,481,930 
           
Operating Expenses          
Selling and marketing expenses   2,503,833    1,849,639 
General and administrative expenses   2,508,264    2,674,318 
Research and development   197,119    502,209 
Goodwill impairment   682,145    - 
Depreciation and amortization expense   52,554    45,478 
           
Total Operating Expenses   5,943,915    5,071,644 
           
Loss from Operations   (5,294,054)   (3,589,714)
           
OTHER INCOME (EXPENSE)          
Other income   744    400 
Commitment fee   (1,546,920)   (1,243,148)
Gain on net change in derivative liability and conversion of debt   2,334,781    1,527,714 
Interest expense   (726,356)   (841,082)
           
TOTAL OTHER INCOME (EXPENSE)   (62,249)   (556,116)
           
NET (LOSS)  $(5,231,805)  $(4,145,830)
           
BASIC AND DILUTED LOSS PER SHARE ATTRIBUTABLE TO SHAREHOLDERS'  $(0.10)  $(0.33)
           
WEIGHTED-AVERAGE COMMON SHARES OUTSTANDING, BASIC AND DILUTED   53,303,847    12,470,715 

 

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, 2017 AND 2016

 

                       Accumulated         
   Preferred stock   Common stock   Additional Paid-in   Other Comprehensive   Accumulated     
   Shares   Amount   Shares   Amount   Capital   loss   Deficit   Total 
Balance at December 31, 2015   11,000   $1    6,645,395   $665   $46,330,041   $(47)  $(59,083,777)  $(12,753,117)
                                         
Common stock issuance  for cash   -    -    3,366,333    337    1,140,380    -    -    1,140,717 
                                         
Common stock issuance for conversion of debt   -    -    3,880,358    388    779,277    -    -    779,665 
                                         
Common stock issuance for settlement of accounts payable   -    -    540,288    54    174,946    -    -    175,000 
                                         
Common stock issued at fair value for services and commitment fees   -    -    6,519,794    651    2,454,600    -    -    2,455,251 
                                         
Common stock issued for conversion of preferred stock   (3,334)        476,286    48    (48)   -    -    - 
                                         
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    21,428,454    2,143    51,428,976    (92)   (63,229,607)   (11,798,579)
                                         
Common stock issuance  for cash   -    -    25,055,362    2,506    1,652,235    -    -    1,654,741 
                                         
Common stock issuance for conversion of debt   -    -    15,675,714    1,567    1,459,536    -    -    1,461,103 
                                         
Common stock issuance for settlement of accounts payable   -    -    886,700    89    117,842    -    -    117,931 
                                         
Common stock issued at fair value for services and commitment fees   -    -    49,366,591    4,936    3,870,543    -    -    3,875,479 
                                         
Common stock issued for conversion of preferred stock   (3,333)   -    476,143    48    (48)   -    -    - 
                                         
Preferred Series A purchased   (1,000)   -    -    -    -    -    -    - 
                                         
Preferred Series C issued   1,000    -    -    -    -    -    -    - 
                                         
Stock compensation cost   -    -    -    -    89,476    -    -    89,476 
                                         
Other comprehensive loss   -    -    -    -    -    (42)   -    (42)
                                         
Net loss for the year ended December 31, 2017   -    -    -    -    -    -    (5,231,805)   (5,231,805)
                                         
Balance at December 31, 2017   4,333   $1    112,888,964   $11,289   $58,618,560   $(134)  $(68,461,412)  $(9,831,696)

 

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

 

 F-4 

 

ORIGINCLEAR, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS

FOR THE YEARS ENDED DECEMBER 31, 2017 AND 2016

  

 

   Years Ended 
   December 31, 2017   December 31, 2016 
CASH FLOWS FROM OPERATING ACTIVITIES:        
Net loss  $(5,231,805)  $(4,145,830)
Adjustment to reconcile net loss to net cash used in operating activities          
Depreciation and amortization   52,555    45,478 
Common stock and warrants issued for services and commitment fees   3,875,479    2,455,251 
Stock option and warrant compensation expense   89,476    533,009 
Gain on net change in valuation of derivative liability and conversion of debt   (2,334,781)   (1,527,714)
Debt discount and original issue discount  recognized as interest expense   416,679    487,693 
Goodwill Impairment   682,145    - 
Change in Assets (Increase) Decrease in:          
Contracts receivable   (107,546)   683,328 
Cost in excess of billing   (40,977)   (30,864)
Other receivable   -    100,000 
Inventory asset   (13,614)   - 
Prepaid expenses   (19,479)   (11,651)
Work in progress   1,928    9,281 
Other asset   -    (194,698)
Change in Liabilities Increase (Decrease) in:          
Accounts payable   465,523    306,567 
Accrued expenses   229,242    344,355 
Billing in excess of cost   154,048    (503,718)
Deferred income   15,500    (150,000)
           
NET CASH USED IN OPERATING ACTIVITIES   (1,765,627)   (1,599,513)
           
CASH FLOWS FROM INVESTING ACTIVITIES:          
Purchase of fixed assets   (41,270)   (10,133)
           
CASH USED IN INVESTING ACTIVITIES   (41,270)   (10,133)
           
CASH FLOWS FROM FINANCING ACTIVITIES:          
Loans payable   15,699    - 
Proceeds from convertible promissory notes   225,000    125,000 
Proceeds for issuance of common stock for cash   1,654,741    1,140,717 
           
NET CASH PROVIDED BY FINANCING ACTIVITIES   1,895,440    1,265,717 
           
Foreign currency effect on cash flow   (42)   (45)
           
NET INCREASE (DECREASE) IN CASH   88,501    (343,974)
           
CASH BEGINNING OF YEAR   351,321    695,295 
           
CASH END OF YEAR  $439,822   $351,321 
           
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION          
Interest paid  $2,105   $2,199 
Taxes paid  $-   $- 
           
SUPPLEMENTAL DISCLOSURES OF NON CASH TRANSACTIONS          
Common stock issued at fair value for conversion of debt and accrued interest  $1,461,103   $779,665 
Common stock issued at fair value on settlement of accounts payable  $117,931   $175,000 
Common stock issued at fair value for supplemental shares  $1,546,920   $1,243,148 
Beneficial conversion feature on convertible note  $-   $16,771 
Conversion of accounts payable into a convertible note  $-   $430,896 

 

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, 2017 AND 2016

 

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. 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 Technologies Limited (OCT), formerly OriginClear (HK) Limited, in Hong Kong, China. The Company granted OCT a master license for the People’s Republic of China. In turn, OCT is expected to license regional joint ventures for water treatment. As of December 31, 2017, OCT 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.  

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, 2017, the Company did not generate significant revenue, incurred a net loss of $5,231,805 and used cash in operations of $1,765,621.  As of December 31, 2017, the Company had a working capital deficiency of $7,194,220 and a shareholders’ deficit of $9,831,696.   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, 2017 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, 2017, the Company obtained funds from the issuance of convertible note agreements and from sales of its common stock and warrants. Management believes this funding will continue from its’ current investors and from new investors. The Company also generated revenue of $3,355,632 and has standing purchase orders and open invoices with customers which will provide funds for operations. Management believes the existing shareholders, the prospective new investors and future sales will provide the additional cash needed to meet the Company’s obligations as they become due, and will allow the development of its core business operations. No assurance can be given that any future financing will be available or, if available, that it will be on terms that are satisfactory to the Company. Even if the Company is able to obtain additional financing, it may contain undue restrictions on our operations, in the case of debt financing or cause substantial dilution for our 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 Technologies, Ltd (formerly OriginClear HK, 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, derivatives, revenue recognition, intangibles, allowance for doubtful accounts, 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, 2017 AND 2016

 

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, 2017, the cash balance in excess of the FDIC limits was $7,634 and $18,821 in foreign (Hong Kong) bank account which is not federally insured. 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, 2017 and 2016, 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 
     2017   2016 
  (Loss) to common shareholders (Numerator)  $(5,231,805)  $(4,145,830)
             
  Basic and diluted weighted average number of common shares outstanding denominator   53,303,847    12,470,715 

 

The Company has excluded 3,697,495 stock options, 53,562,961 warrants, and the shares issuable from convertible debt of $3,818,068 and shares issuable from convertible preferred stock for the year ended December 31, 2017, because their impact on the loss per share is anti-dilutive.

 

The Company has excluded 3,697,495 stock options, 506,026 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.

 

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, 2017 and 2016, were $88,589 and $47,612, respectively. The billing in excess of cost for the years ending December 31, 2017 and 2016, was $154,048 and $0, 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, 2017 AND 2016

 

2.SUMMARY OF SIGNIFICANT ACCOUNTING POLICES (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 $6,996 and $50,000 as of December 31, 2017 and 2016, respectively. The net contract receivable balance was $490,441 and $382,895 at December 31, 2017 and 2016, 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, 2017 and 2016, and determined there was impairment of goodwill of 682,145 as of December 31, 2017.

 

Research and Development

Research and development costs are expensed as incurred. Total research and development costs were $197,119 and $502,209 for the years ended December 31, 2017 and 2016, respectively.

 

Advertising Costs

The Company expenses the cost of advertising and promotional materials when incurred. The advertising costs were $163,332 and $189,429 for the years ended December 31, 2017 and 2016, 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 3-6  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, 2017 AND 2016

 

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 Binomial lattace 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, 2017, 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, 2017 and 2016.

        

     Total   (Level 2)   (Level 2)   (Level 3) 
                   
  Derivative Liability, December 31, 2017  $5,531,183   $-   $-   $5,531,183 
  Derivative Liability, December 31, 2016  $8,702,083   $-   $-   $8,702,083 

 

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, 2016  $9,317,475 
  Fair Value of derivative liabilities issued   1,122,762 
  Loss on conversion of debt and change in derivative liability   (1,738,154)
  Balance as of December 31, 2016  $8,702,083 
  Fair Value of derivative liabilities issued   53,551 
  Gain on conversion of debt and change in derivative liability   (3,224,451)
  Balance as of December 31, 2017   5,531,183 

 

 F-9 

 

 

ORIGINCLEAR, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

DECEMBER 31, 2017 AND 2016

 

2.SUMMARY OF SIGNIFICANT ACCOUNTING POLICES (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:

 

     12/31/2017   12/31/2016 
  Risk free interest rate   1.55% - 1.98%    .01% - 1.02% 
  Stock volatility factor   87.0% - 95.0%    4.72% - 189.09% 
  Weighted average expected option life   6 months - 5 years    6 months - 5 years 
  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. The Company is currently 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 May 2017, FASB issued accounting standards update ASU-2017-09, “Compensation-Stock Compensation” (Topic 718) –Modification Accounting”, to provide clarity and reduce both (1) diversity in practice and (2) cost and complexity when applying the guidance in Topic 718, Compensation-Stock Compensation, to a change to the terms or conditions of a share-based payment award. The amendments in this ASU are effective for all entities for annual periods, and interim periods within those annual periods, beginning after December 15, 2017. Early adoption is permitted, including adoption in an interim period for public entities for reporting periods for which financial statements have not yet been issued, and all other entities for reporting periods for which financial statements have not yet been made available for issuance. The Company is currently evaluating the impact of the adoption of ASU 2017-09 on the Company’s financial statements beginning January 1, 2018.

 

In August 2017, FASB issued accounting standards update ASU-2017-12, “D” (Topic 815) – “Targeted Improvements to Accounting for Hedging Activities”, to require an entity to present the earnings effect of the hedging instrument in the same statement line item in which the earnings effect of the hedged item is reported. The amendments in this update are effective for fiscal years beginning after December 15, 2018, and interim periods within those fiscal years. For all other entities, the amendments are effective for fiscal years beginning after December 15, 2019, and interim periods with the fiscal years beginning after December 15, 2020. Early adoption is permitted in any interim period after issuance of the update. The Company is currently evaluating the impact of the adoption of ASU 2017-12 on the Company’s financial statements.

 

Management reviewed currently issued pronouncements during the year ended December 31, 2017, and does not believe that any other recently issued, but not yet effective, accounting standards, if currently adopted, would have a material effect on the accompanying condensed financial statements.

 

3. PROPERTY & EQUIPMENT

 

Property and Equipment consists of the following as of December 31, 2017 and 2016:

 

     2017   2016 
           
  Machinery & equipment  $136,188    164,904 
  Furniture & fixtures   27,452    27,452 
  Computer equipment   54,769    53,594 
  Vehicles   64,277    31,358 
  Capitalized assets   36,139    - 
  Leasehold improvements   26,725    26,725 
      345,551    304,281 
  Less accumulated depreciation and amortization   (194,923)   (142,369)
             
     $150,628    161,912 

 

During the years ended December 31, 2017 and 2016, depreciation and amortization expense was $52,554 and $45,478, respectively.

 

 F-10 

 

 

ORIGINCLEAR, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

DECEMBER 31, 2017 AND 2016

 

4.CAPITAL STOCK

 

Preferred Stock

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 consists 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. On August 12, 2016, the agreement was amended to include make-good-shares. The conversion price is to be adjusted to reflect the lower of $1.05 or the price of the Company’s Common Stock calculated using the average closing prices of the Company’s Common Stock on the last three (3) trading days prior to the date of conversion, provided, however, if the Average Closing Price is less than $0.35 per share, the adjusted conversion price shall be $0.35 per share.

 

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 $1.05 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. Accordingly, the preferred stock is valued under the provision of ASC Topic 815, Derivatives and Hedging, because the conversion feature of the preferred stock was not afforded the exemption for conventional convertible instruments due to its variable conversion rate. The Series B Preferred Stock shall have the rights, preferences and privileges as set forth in the exchange agreement.

 

During the year ended December 31, 2017, the Company issued 476,143 shares of common stock upon conversion of 3,333 shares of preferred stock at a price of $1.05 per share, plus 952,572 make good shares at a price of $0.35 per share. As of December 31, 2017, a balance of 3,333 shares of Series B Preferred Stock remain.

 

On September 29, 2015, the Board of Directors of the Company adopted a Certificate of Designation establishing the rights, preferences, privileges and other terms of Series A Preferred Stock, par value $0.0001 per share, (“Series A Preferred Stock”) providing for supermajority voting rights to holders of Series A Preferred Stock. The Board believes that it is in the best interest of the stockholders of the Corporation that the Series A Preferred Stock be issued to the Company’s Chief Executive Officer and Director, T. Riggs Eckelberry. Upon filing of the New Series A Preferred Stock Certificate of Designation in accordance with the provisions of Nevada law, the Board authorized the Corporation to issue 1,000 shares of New Series A Preferred Stock to Mr. Eckelberry. 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.

 

On March 14, 2017, the Board of Directors of the Company adopted a Certificate of Designation establishing the rights, preferences, privileges and other terms of New Series C Preferred Stock, par value $0.0001 per share, (“New Series C Preferred Stock”) providing for supermajority voting rights to holders of New Series C Preferred Stock. The Board believes that it is in the best interest of the stockholders of the Corporation that the New Series C Preferred Stock be issued to the Company’s Chief Executive Officer and Director, T. Riggs Eckelberry. The purchase price of the New Series C Preferred Stock was $0.0001 per share representing a total purchase price of $0.10 for 1,000 shares.

 

Common Stock

On April 7, 2017, the Company filed a certificate of amendment to its articles of incorporation with the State of Nevada effectuating a reverse split of the Company’s common stock at a ratio of 1 for 35 (the “Reverse Split”). The Reverse Split became effective in the State of Nevada on April 12, 2017. Unless otherwise indicated, all share amounts, per share data, share prices, exercise prices, and conversion rates set forth in this Quarterly Report and the accompanying unaudited condensed consolidated financial statement have, where applicable been adjusted retroactively to reflect this reverse stock split.

 

On June 30, 2017, the Company filed a certificate of amendment (the “June Certificate of Amendment”) to amend Article 3 of its articles of incorporation with the State of Nevada, effectuating a decrease of the number of authorized shares of the Company. Pursuant to the June Certificate of Amendment, the Company reduced the number of authorized shares of its common stock to 300,000,000. The June Certificate of Amendment became effective upon filing with the State of Nevada on June 30, 2017. The reduction in the number of authorized shares did not affect the shares of the Company’s stock issued and outstanding at that time.

 

On December 1, 2017, the Company filed a certificate of amendment (the “December Certificate of Amendment”) to amend Article 3 of its articles of incorporation with the State of Nevada, effectuating an increase of the number of authorized shares of the Company. Pursuant to the December Certificate of Amendment, the Company increased the number of authorized shares of its common stock to 900,000,000. The December Certificate of Amendment became effective upon filing with the State of Nevada on December 1, 2017. The increase in the number of authorized shares does not affect the shares of the Company’s stock issued and outstanding.

 

 F-11 

 

 

ORIGINCLEAR, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

DECEMBER 31, 2017 AND 2016

 

4.CAPITAL STOCK (Continued)

 

Year ended December 31, 2017

 

The Company issued 25,055,362 shares of common stock through a private placement at an average price of $0.066 per share for cash in the amount of $1,654,741.

 

The Company issued 15,675,714 shares of common stock for the settlement of convertible promissory notes in an aggregate principal in the amount of $469,000, plus interest in the amount of $130,364, with a fair value loss of $861,739 based upon conversion prices of $0.031 up to $0.21.

 

The Company issued 886,700 shares of common stock for the settlement of accounts payable with a fair value of $117,931, which includes a fair value loss on settlement of $27,931.

 

The Company issued 49,366,591 shares of common stock for services and commitment fees at fair value of $3,875,479.

 

Year ended December 31, 2016

 

The Company issued 3,366,333 shares of common stock through a private placement at a price of $0.35 per share for cash in the amount of $1,140,717.

 

The Company issued 3,880,358 shares of common stock for the settlement of convertible promissory notes in an aggregate principal in the amount of $669,000, plus interest in the amount of $110,666, based upon conversion prices of $0.34 up to $1.23.

 

The Company issued 540,288 shares of common stock for the settlement of accounts payable with a fair value of $175,000.

 

The Company issued 6,519,794 shares of common stock for services and commitment fees at fair value of $2,455,251.

 

5.CONVERTIBLE PROMISSORY NOTES

 

As of December 31, 2017, the outstanding convertible promissory notes are summarized as follows:

 

  Convertible Promissory Notes, net of debt discount  $3,577,931 
  Less current portion   766,931 
  Total long-term liabilities  $2,811,000 

 

Maturities of long-term debt for the next three years are as follows:

 

  Year Ending    
  December 31,  Amount 
  2019   871,000 
  2020   1,815,000 
  2021   125,000 
     $2,811,000 

 

At December 31, 2017, the $3,818,068 in convertible promissory notes has a remaining debt discount of $240,137, leaving a net balance of $3,577,931.

 

On various dates, the Company entered into unsecured convertible notes (the “Convertible Promissory Notes” or “Notes”), that matured during the period and were extended sixty (60) days from the effective date of each Note. The Notes bear interest at 10% per annum. The Notes may be converted into shares of the Company’s common stock at conversion prices ranging from the lesser of $2.10 to $4.90 (subject to adjustment for stock splits, dividends, combinations and other similar transactions) or 50% of the lowest trade price on any trade day following issuance of the Notes.  In addition, for as long as the Notes or other convertible notes in effect between the purchaser and the Company are outstanding, if the Company issues any security with terms more favorable than the terms of the Notes or such other convertible notes or a term was not similarly provided to the purchaser of the Notes or such other convertible notes, then such more favorable or additional term shall, at the purchaser’s option, become part of the Notes and such other convertible notes. The conversion feature of the Notes was considered a derivative in accordance with current accounting guidelines because of the reset conversion features of the Notes. During the year ended December 31, 2017, the Company issued 15,675,714 shares of common stock, upon conversion of $469,000 in principal, plus accrued interest of $130,364, with a fair value loss on settlement of $861,739. As of December 31, 2017, the Notes had an aggregate remaining balance of $1,486,000.

 

 F-12 

 

 

ORIGINCLEAR, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

DECEMBER 31, 2017 AND 2016

 

5.CONVERTIBLE PROMISSORY NOTES (Continued)

 

As of December 31, 2017, unsecured convertible promissory notes (the “OID Notes”) had an aggregate remaining balance of $184,124, plus accrued interest of $13,334 were amended. The OID Notes included an original issue discount and one-time interest, which has been fully amortized. The OID Notes matured on December 31, 2017, and were extended to June 30, 2018. The OID Notes were convertible into shares of the Company’s common stock at a conversion price initially of $15.31. After the amendment, the conversion price changed to the lesser of $2.80 per share, or b) fifty percent (50%) of the lowest trade price of common stock recorded since the original effective date of this note, or c) the lowest effective price per share granted to any person or entity after the effective date.  The conversion feature of the notes was considered a derivative in accordance with current accounting guidelines, because of the reset conversion features of the notes.

 

The Company entered into various, unsecured convertible notes (the “Notes”), on various dates ending on May 19, 2016. The Notes matured and were extended from the date of each tranche through maturity dates ending on May 19, 2020. The Notes bear interest at 10% per annum. The Notes may be converted into shares of the Company’s common stock at conversion prices ranging from the lesser of $0.70 to $2.80 (subject to adjustment for stock splits, dividends, combinations and other similar transactions) or 50% of the lowest trade price on any trade day following issuance of the Notes.  The conversion feature of the Notes was considered a derivative in accordance with current accounting guidelines because of the reset conversion features of the Notes. The remaining balance of the note as of December 31, 2017, was $1,325,000. The Company recorded amortization of debt discount, which was recognized as interest expense in the amount of $11,479 during the year ended December 31, 2017. 

 

The Company issued a convertible note in exchange for an account payable in the amount of $432,048, which could be converted into shares of the Company’s common stock after December 31, 2015. The note was accounted for under ASC 470, whereby, a beneficial conversion feature was recorded at time of issuance. The note did not meet the criteria of a derivative, and was accounted for as a beneficial conversion feature, which was amortized over the life of the note and recognized as interest expense in the financial statements. On January 1, 2016, the note met the criteria of a derivative and was accounted for under ASC 815. The note has zero stated interest rate, and the conversion price shall be equal to 75% of the average three lowest last sale prices traded during the 25 trading days immediately prior to conversion. As of December 31, 2016, the remaining balance was $257,048. During the nine months ended September 30, 2017, the Company issued 886,700 shares of common stock upon conversion of principal in the amount of $90,000, with a fair value loss on settlement of $27,931. As of December 31, 2017, the Note had a remaining balance of $167,048. The Company recorded amortization of debt discount, which was recognized as interest expense in the amount of $216,024 during the year ended December 31, 2017. 

 

The Company issued a convertible note in exchange for an account payable in the amount of $430,896, which could be converted into shares of the Company’s common stock after September 15, 2016. The note was accounted for under ASC 470, whereby, a beneficial conversion feature was recorded at time of issuance. On September 15, 2016, the note met the criteria of a derivative and was accounted for under ASC 815. The note has zero stated interest rate, and the conversion price shall be equal to 75% of the average three lowest last sale prices traded during the 25 trading days immediately prior to conversion. The note did not meet the criteria of a derivative at the time it was entered into, and was accounted for as a beneficial conversion feature, which was amortized over the life of the note and recognized as interest expense in the financial statements. The conversion feature of the Note was considered a derivative in accordance with current accounting guidelines because of the reset conversion feature of the Note. The Company recorded amortization of debt discount, which was recognized as interest expense in the amount of $187,906 during the year ended December 31, 2017. Total debt discount as of December 31, 2017 was $187,906.

 

The Company entered into an unsecured convertible note (the “Dec 20 Note”), in the amount of $150,000 on December 20, 2017. The Dec 20 Note matures on December 20, 2018. The Dec 20 Note bears interest at 10% per annum. The Dec 20 Note may be converted into shares of the Company’s common stock at a conversion price of the lesser of $0.03 per share or 50% of the lowest trade price during the twenty trading days immediately before the conversion. The conversion feature of the Dec 20 Note was considered a derivative in accordance with current accounting guidelines because of the reset conversion features of the Dec 20 Note. The Company recorded amortization of debt discount, which was recognized as interest expense in the amount of $1,108 during the year ended December 31, 2017.  Total debt discount as of December 31, 2017 was $43,820.

 

The Company entered into an unsecured convertible note (the “Dec 22 Note”), in the amount of $75,000 on December 22, 2017. The Dec 22 Note matures on December 22, 2018. The Dec 22 Note bears interest at 10% per annum. The Dec 22 Note may be converted into shares of the Company’s common stock at a conversion price of the lesser of $0.05 per share or 50% of the lowest trade price during the twenty trading days upon default of the prepayment date. The conversion feature of the Dec 22 Note was considered a derivative in accordance with current accounting guidelines because of the reset conversion features of the Dec 22 Note. The Company recorded amortization of debt discount, which was recognized as interest expense in the amount of $213 during the year ended December 31, 2017. Total debt discount as of December 31, 2017 was $8,410.

 

We evaluated the financing transactions in accordance with ASC Topic 815, Derivatives and Hedging, and determined that the conversion feature of the convertible promissory notes was not afforded the exemption for conventional convertible instruments due to its variable conversion rate. The note has no explicit limit on the number of shares issuable so they did not meet the conditions set forth in current accounting standards for equity classification. The Company elected to recognize the note under paragraph 815-15-25-4, whereby, there would be a separation into a host contract and derivative instrument. The Company elected to initially and subsequently measure the note in its entirety at fair value, with changes in fair value recognized in earnings. The Company recorded a derivative liability representing the imputed interest associated with the embedded derivative. The derivative liability is adjusted periodically according to the stock price fluctuations.

 

The derivative liability recognized in the financial statements as of December 31, 2017 was $5,531,183.

 

 F-13 

 

 

ORIGINCLEAR, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

DECEMBER 31, 2017 AND 2016

 

6.OPTIONS AND WARRANTS

 

Options

On May 25, 2012, the Board of Directors adopted a new OriginOil, Inc., 2012 Incentive Stock Option Plan (the “2012 Plan”) for the purposes of granting stock options to its employees and others providing services to the Company, which reserves and sets aside for the granting of options for 28,571 shares of Common Stock.  Options granted under these Plans may be either incentive options or nonqualified options and shall be administered by the Company's Board.  Each Option shall be exercisable to the nearest whole share, in installments or otherwise, as the respective option agreements may provide. Notwithstanding any other provision of the Plan or of any option agreement, each Option shall expire on the date specified in the option agreement, which date shall not be later than the tenth (10th) anniversary from the effective date of grant.

 

On June 14, 2013, the Board of Directors adopted a new OriginOil, Inc., 2013 Incentive Stock Option Plan (the “2013 Plan”) for the purposes of granting stock options to its employees and others providing services to the Company, which reserves and sets aside for the granting of options for 114,286 shares of Common Stock.  Options granted under the Plan may be either incentive options or nonqualified options and shall be administered by the Company's Board.  Each Option shall state the number of shares to which it pertains. The exercise price will be determined by the holders percentage owned as follows: If the holder owns more than 10% of the total combined voting power or value of all classes of stock of the Company, then the exercise price will be no less than 110% of the fair market value of the stock as of the date of grant; if the person is not a 10% holder, then the exercise price will be no less than 100% of the fair market value of the stock as of the date of grant. Notwithstanding any other provision of the 2013 Plan or of any option agreement, each Option shall expire on the date specified in the option agreement, which date shall not be later than the tenth (10th) anniversary from the date of grant. If the status of an employee terminates for any reason other than disability or death, then the Optionee or their representative shall have the right to exercise the portion of any Options which were exercisable as of the date of such termination, in whole or in part, not less than 30 days nor more than three (3) months after such termination.

 

Options

On September 29, 2015, the Board of Directors adopted a new OriginOil, Inc., 2015 Equity Incentive Stock Option Plan (the “2015 Plan”) for the purposes of granting stock options to its employees and others providing services to the Company, which reserves and sets aside for the granting of options for 3,315,714 shares of Common Stock. On October 2, 2015, the Board of Directors amended the number of shares to reserve for issuance to 4,571,429 shares. Options granted under these Plans may be either incentive options or nonqualified options and shall be administered by the Company's Board.  Each Option shall be exercisable to the nearest whole share, in installments or otherwise, as the respective option agreements may provide. Notwithstanding any other provision of the Plan or of any option agreement, each Option shall expire on the date specified in the option agreement, which date shall not be later than the fifth (5th) anniversary from the effective date of grant.

 

During the year ended December 31, 2017, the Company did not grant any shares of incentive stock options to employees, or non-statutory options to consultants. The stock options mature on March 29, 2021 and October 17, 2021, at prices of $0.29 and $1.31.

 

With respect to Non-Statutory Options granted to employees, directors or consultants, the Board or Committee may specify such period for exercise that the Option shall automatically terminate following the termination of employment or services as to shares covered by the Option as the Board or Committee deems reasonable and appropriate.

 

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

 

     December 31, 2017   December 31, 2016 
         Weighted       Weighted 
     Number   average   Number   average 
     of   exercise   of   exercise 
     Options   price   Options   price 
  Outstanding, beginning of year   3,697,495   $1.505    3,411,561   $1.750 
  Granted   -   $-    471,429   $0.315 
  Exercised   -   $-    -   $- 
  Forfeited/Expired   -   $-    (185,495)  $2.450 
  Outstanding, end of year   3,697,495   $1.505    3,697,495   $1.505 
  Exercisable at the end of year   2,682,644   $1.028    2,625,147   $1.715 
  Weighted average fair value of options granted during the year       $-        $0.315 

 

 F-14 

 

 

ORIGINCLEAR, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

DECEMBER 31, 2017 AND 2016

 

6.OPTIONS AND WARRANTS (Continued)

 

The weighted average remaining contractual life of options outstanding issued under the 2009 Plan, 2013 Plan, and 2015 Plan as of December 31, 2017 and 2016 was as follows:

 

        December 31, 2017     December 31, 2016  
                    Weighted                 Weighted  
                    Average                 Average  
        Stock     Stock     Remaining     Stock     Stock     Remaining  
  Exercisable     Options     Options     Contractual     Options     Options     Contractual  
  Prices     Outstanding     Exercisable     Life (years)     Outstanding     Exercisable     Life (years)  
  $  6.65 - 31.15        52,276       50,401       4.59 - 6.77       52,276       46,472       5.59 - 7.77  
  $ 14.35 - 15.40        32,362       32,362       5.71       32,362       26,294       6.71  
  $ 1.31       3,612,857       2,599,881       2.77 - 3.80       3,612,857       2,552,381       3.77 - 4.80  
            3,697,495       2,682,644               3,697,495       2,625,147          

  

Stock-based compensation expense recognized during the year is based on the value of the portion of stock-based payment awards that is ultimately expected to vest. Stock-based compensation expense recognized in the financial statements of operations during the years ended December 31, 2017 and 2016 were $89,476 and $533,009, respectively.

 

Restricted Stock to CEO

On May 12, 2016, the Company entered into a Restricted Stock Grant Agreement (“the RSGA”) with its Chief Executive Officer, T. Riggs Eckelberry, to create management incentives to improve the economic performance of the Company and to increase its value and stock price. All shares issuable under the RSGA are performance based shares and none have yet vested nor have any been issued. The RSGAs provides for the issuance of up to 1,714,286 shares of the Company’s common stock to Mr. Eckelberry provided certain milestones are met in certain stages; a) If the Company’s consolidated gross revenue, calculated in accordance with generally accepted accounting principles, consistently applied, equals or exceeds $15,000,000 for the trailing twelve month period as reported in the Company’s quarterly or annual financial statements, the Company will issue up to 857,143 shares of its common stock; b) If the Company’s consolidated operating profit (Operating Profit = Operating Revenue - Cost of Goods Sold - Operating Expenses - Depreciation & Amortization), calculated in accordance with generally accepted accounting principles, equals or exceeds $1,500,000 for the trailing twelve month period as reported as reported in the Company’s SEC reports, the Company will issue up to 857,143 shares of its common stock. If change in control occurs, the RSGA shall become fully vested. The Company has not recognized any costs associated with the milestones, due to not being able to estimate the probability of it being achieved. As the performance goals are achieved, the shares shall become eligible for vesting and issuance.

 

On August 10, 2016, the Company entered into a Restricted Stock Grant Agreement (“the August RSGA”) with its Chief Executive Officer, T. Riggs Eckelberry, to create management incentives to improve the economic performance of the Company and to increase its value and stock price. All shares issuable under the August RSGA are performance based shares and none have yet vested nor have any been issued. The August RSGA provides for the issuance of up to 1,714,286 shares of the Company’s common stock to Mr. Eckelberry provided certain milestones are met in certain stages; a) If the Company’s consolidated gross revenue, calculated in accordance with generally accepted accounting principles, consistently applied, equals or exceeds $15,000,000 for the trailing twelve month period, the Company will issue up to 857,143 shares of its common stock; b) If the Company’s consolidated operating profit (Operating Profit = Operating Revenue - Cost of Goods Sold - Operating Expenses - Depreciation & Amortization), calculated in accordance with generally accepted accounting principles, equals or exceeds $1,500,000 for the trailing twelve month period as reported as reported in the Company’s SEC Reports, the Company will issue up to 857,143 shares of its common stock. If change in control occurs, the August RSGA shall become fully vested. The Company has not recognized any costs associated with the milestones, due to not being able to estimate the probability of it being achieved. As the performance goals are achieved, the shares shall become eligible for vesting and issuance.

 

Restricted Stock to Employees and Consultants

On May 12, 2016, the Company entered into a Restricted Stock Grant Agreement (“the First Employee RSGA”) with an employee, to create management incentives to improve the economic performance of the Company and to increase its value and stock price. All shares issuable under the First Employee RSGA are performance based shares and none have yet vested nor have any been issued. The First Employee RSGA provides for the issuance of up to 857,143 shares of the Company’s common stock to the employees provided certain milestones are met in certain stages; a) If the Company’s consolidated gross revenue, calculated in accordance with generally accepted accounting principles, consistently applied, equals or exceeds $15,000,000 for the trailing twelve month period as reported in the Company’s quarterly or annual financial statements, the Company will issue up to 428,571 shares of its common stock; b) If the Company’s consolidated operating profit (Operating Profit = Operating Revenue - Cost of Goods Sold - Operating Expenses - Depreciation & Amortization), calculated in accordance with generally accepted accounting principles, equals or exceeds $1,500,000 for the trailing twelve month period as reported as reported in the Company’s SEC reports, the Company will issue up to 428,571 shares of its common stock. If change in control occurs, the First Employee RSGA shall become fully vested. The Company has not recognized any costs associated with the milestones, due to not being able to estimate the probability of it being achieved. As the performance goals are achieved, the shares shall become eligible for vesting and issuance.

 

 F-15 

 

 

ORIGINCLEAR, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

DECEMBER 31, 2017 AND 2016

 

6.OPTIONS AND WARRANTS (Continued)

 

Restricted Stock to Employees and Consultants (Continued)

On May 12, 2016, the Company entered into a Restricted Stock Grant Agreement (“the Second Employee RSGA”) with an employee, to create management incentives to improve the economic performance of the Company and to increase its value and stock price. All shares issuable under the Second Employee RSGA are performance based shares and none have yet vested nor have any been issued. The Second Employee RSGA provides for the issuance of up to 571,429 shares of the Company’s common stock to the Employee provided certain milestones are met in certain stages; a) If the Company’s consolidated gross revenue, calculated in accordance with generally accepted accounting principles, consistently applied, equals or exceeds $15,000,000 for the trailing twelve month period as reported in the Company’s quarterly or annual financial statements, the Company will issue up to 285,714 shares of its common stock; b) If the Company’s consolidated operating profit (Operating Profit = Operating Revenue - Cost of Goods Sold - Operating Expenses - Depreciation & Amortization), calculated in accordance with generally accepted accounting principles, equals or exceeds $1,500,000 for the trailing twelve month period as reported as reported in the Company’s SEC Reports, the Company will issue up to 285,714 shares of its common stock. If change in control occurs, the Second Employee RSGA shall become fully vested. The Company has not recognized any costs associated with the milestones, due to not being able to estimate the probability of it being achieved. As the performance goals are achieved, the shares shall become eligible for vesting and issuance.

 

On August 10, 2016, the Company entered into a Restricted Stock Grant Agreement (“the Consultants RSGA”) with two of its’ consultants, to create management incentives to improve the economic performance of the Company and to increase its value and stock price. All shares issuable under the Consultants RSGA are performance based shares and none have yet vested nor have any been issued. The Consultants RSGA provides to each of the consultants the issuance of up to 285,714 shares of the Company’s common stock provided certain milestones are met in certain stages; a) If the Company’s consolidated gross revenue, calculated in accordance with generally accepted accounting principles, consistently applied, equals or exceeds $15,000,000 for the trailing twelve month period, the Company will issue to each of the consultants up to 142,857 shares of its common stock; b) If the Company’s consolidated operating profit (Operating Profit = Operating Revenue - Cost of Goods Sold - Operating Expenses - Depreciation & Amortization), calculated in accordance with generally accepted accounting principles, equals or exceeds $1,500,000 for the trailing twelve month period as reported as reported in the Company’s SEC reports, the Company will issue up to 142,857 shares to each of the consultants, its common stock. If change in control occurs, the Consultants RSGA shall become fully vested. The Company has not recognized any costs associated with the milestones, due to not being able to estimate the probability of it being achieved. As the performance goals are achieved, the shares shall become eligible for vesting and issuance.

 

Warrants

During the year ended December 31, 2017, 53,090,625 warrants were issued by the Company. No warrants were issued by the Company during the year ended December 31, 2016. A summary of the Company’s warrant activity and related information follows for the years ended December 31, 2017 and 2016:

        

     December 31, 2017   December 31, 2016 
         Weighted       Weighted 
     Number   average   Number   average 
     of   exercise   of   exercise 
     Warrants   price   Warrants   price 
  Outstanding -beginning of year   506,026   $6.30    665,632   $7.35 
  Granted   53,090,625   $0.015    -   $- 
  Exercised   -   $-    -   $- 
  Forfeited   (33,690)  $23.93    (159,606)  $5.60 
  Outstanding - end of year   53,562,961   $5.40    506,026   $6.30 

 

 At December 31, 2017 and 2016, the weighted average remaining contractual life of warrants outstanding:

 

        December 31, 2017     December 31, 2016  
                    Weighted                 Weighted  
                    Average                 Average  
                    Remaining                 Remaining  
  Exercisable     Warrants     Warrants     Contractual     Warrants     Warrants     Contractual  
  Prices     Outstanding     Exercisable     Life (years)     Outstanding     Exercisable     Life (years)  
  $ 0.04 - 5.25       53,547,769       53,547,769       0.27 - 1.42       479,120       479,120       0.49 - 1.45  
  $ 8.75 - 9.10       12,334       12,334       0.25 - 0.72       24,048       24,048       0.32 - 1.72  
  $ 31.50       2,858       2,858       4.88       2,858       2,858       5.88  
            53,562,961       53,562,961               506,026       506,026          

  

At December 31, 2017, the aggregate intrinsic value of the warrants outstanding was $0.

 

 F-16 

 

 

ORIGINCLEAR, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

DECEMBER 31, 2017 AND 2016

 

7.INCOME TAXES

 

The Company files income tax returns in the U.S. Federal jurisdiction, and the state of California. With few exceptions, the Company is no longer subject to U.S. federal, state and local, or non-U.S. income tax examinations by tax authorities for years before 2014.

 

Deferred income taxes have been provided by temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes and the amounts used for tax purposes. To the extent allowed by GAAP, we provide valuation allowances against the deferred tax assets for amounts when the realization is uncertain. Included in the balance at December 31, 2017 and 2016, are no tax positions for which the ultimate deductibility is highly certain, but for which there is uncertainty about the timing of such deductibility. Because of the impact of deferred tax accounting, other than interest and penalties, the disallowance of the shorter deductibility period would not affect the annual effective tax rate but would accelerate the payment of cash to the taxing authority to an earlier period.

 

The Company's policy is to recognize interest accrued related to unrecognized tax benefits in interest expense and penalties in operating expenses. During the periods ended December 31, 2017 and 2016, the Company did not recognize interest and penalties.

 

At December 31, 2017, the Company had net operating loss carry-forwards of approximately $32,321,460, which expire at dates that have not been determined. No tax benefit has been reported in the December 31, 2017 financial statements since the potential tax benefit is offset by a valuation allowance of the same amount.

 

The income tax provision differs from the amount of income tax determined by applying the U.S. federal and state income tax rate to pretax income from continuing operations for the years ended December 31, 2017 and 2016 due to the following:

 

     2017   2016 
  Book loss  $(2,092,700)  $(1,658,300)
  Tax to book differences for deductible expenses   

14,740

    (16,300)
  Tax non deductible expenses   

1,646,400

    919,200 
             
  Valuation Allowance   

431,560

    755,400 
             
  Income tax expense  $-   $- 

  

Deferred taxes are provided on a liability method whereby deferred tax assets are recognized for deductible differences and operating loss and tax credit carry-forwards and deferred tax liabilities are recognized for taxable temporary differences. Temporary differences are the difference between the reported amounts of assets and liabilities and their tax bases. Deferred tax assets are reduced by a valuation allowance when, in the opinion of management, it is more likely than not that some portion or all of the deferred tax assets will not be realized. Deferred tax assets and liabilities are adjusted for the effects of changes in tax laws and rates on the date of enactment.

 

Net deferred tax liabilities consist of the following components as of December 31,

 

     2017   2016 
  Deferred tax assets:        
  NOL carryover  $

9,373,200

   $12,465,500 
  Other carryovers   

397,000

    379,100 
             
  Deferred tax liabilities:          
  Depreciation   

5,800

    (9,800)
             
  Less Valuation Allowance   (9,776,000)   (12,834,800)
             
  Net deferred tax asset  $-   $- 

            

Due to the change in ownership provisions of the Tax Reform Act of 1986, net operating loss carry-forwards for Federal income tax reporting purposes are subject to annual limitations. Should a change in ownership occur, net operating loss carry-forwards may be limited as to use in future years.

 

On December 22, 2017, the U.S. government enacted comprehensive tax legislation commonly referred to as the Tax Cut and Jobs Act (the “Tax Act”).  The Tax Act establishes new tax laws that affects 2018 and future years, including a reduction in the U.S. federal corporate income tax rate to 21%, effective January 1, 2018. For certain deferred tax assets and deferred tax liabilities, we have recorded a provisional decrease of $3,558,200, with a corresponding net adjustment to valuation allowance of $3,558,200 as of December 31, 2017. 

 

 F-17 

 

 

ORIGINCLEAR, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

DECEMBER 31, 2017 AND 2016

 

8.FOREIGN SUBSIDIARY

 

On December 31, 2014, the Company formed a wholly owned subsidiary, OriginClear Technologies Limited (OCT), in Hong Kong, China. The Company granted OCT a master license for the People’s Republic of China. In turn, OCT is expected to license regional joint ventures for water treatment.

 

9.COMMITMENTS AND CONTINGENCIES

 

Operating Lease

The Company holds an agreement for office space located in Los Angeles, California. The initial term was from May 1, 2016 to July 31, 2016 and the term has automatically renewed for successive periods and will continue until terminated in accordance with the agreement.

 

Operating Lease – Related Party

The Company holds a month-to-month lease agreement with a shareholder of the Company for office space in McKinney, Texas at a base rent of $4,850 per month.

 

Warranty Reserve

Generally, a PWT project is guaranteed against defects in material and workmanship for one year from the date of completion, while certain areas of construction and materials may have guarantees extending beyond one year. The Company has various insurance policies relating to the guarantee of completed work, which in the opinion of management will adequately cover any potential claims. A warranty reserve has been provided under PWT based on the opinion of management and based on Company history in the amount of $20,000 for the year ending December 31, 2017.

 

Litigation

From time to time, the Company may become involved in various lawsuits and legal proceedings which arise in the ordinary course of business. However, litigation is subject to inherent uncertainties, and an adverse result in these or other matters may arise from time to time that may harm our business. The Company is currently not party to any such legal proceedings that believes will have, individually or in the aggregate, a material adverse effect on our business, financial condition or operating results.

 

10. CONCENTRATIONS

 

Major Customers

PWT had four major customers for the year ended December 31, 2017. The customers represented 54.5% of billings for the year ending December 31, 2017. The contract receivable balance for the customers was $98,038 at December 31, 2017.

 

PWT had three major customers for the year ended December 31, 2016. The customers represented 58.74% of billings for the year ended December 31, 2016. The contract receivable balance for the customers was $172,589 at December 31, 2016.

 

Major Suppliers

PWT had five major vendors for the year ended December 31, 2017. The vendors represented 40.59% of total expenses in the year ending December 31, 2017. The accounts payable balance due to the vendors was $63,886 at December 31, 2017. Management believes no risk is present with the vendors due to other suppliers being readily available.

 

PWT had four major vendors for the year ended December 31, 2016. The vendors represented 59.79% of total expenses in the year ending December 31, 2016. The accounts payable balance due to the vendors was $38,554 at December 31, 2016. Management believes no risk is present with the vendors due to other suppliers being readily available.

 

11.SUBSEQUENT EVENTS

 

Management has evaluated subsequent events according to the requirements of ASC TOPIC 855 and has determined that there are the following subsequent events:

 

In connection with certain one-time make good agreements, between January 16, 2018 and March 30, 2018, the Company issued an aggregate of 8,267,633 shares of its common stock to certain holders of its common stock. 

 

 F-18 

 

 

ORIGINCLEAR, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

DECEMBER 31, 2017 AND 2016

 

11.SUBSEQUENT EVENTS (Continued)

 

Between January 16, 2018 and March 30, 2018, the Company issued to consultants an aggregate of 6,988,421 shares of the Company’s common stock in lieu of cash considerations. 

 

Between January 23, 2018 and February 27, 2018, holders of convertible notes, known in our filings as “Convertible Promissory Notes” converted an aggregate outstanding principal amount of $50,000, plus unpaid interest of $16,980 into an aggregate of 7,442,162 shares of the Company’s common stock. 

 

On February 20, 2018, the Company entered into a securities purchase agreement with an accredited investor pursuant to which it sold and issued an unsecured convertible promissory note (the “Feb 20 Note”), in the aggregate principal face amount of $53,000. The Feb 20 Note matures 12 months from the date of issuance and bears interest at a rate of 10% per annum. The Feb 20 Note may be converted into shares of the Company’s common stock at a price per share equal to 39% of the lowest trade price of the Company’s common stock recorded during the ten prior trading days from receipt of the conversion notice (subject to adjustment for stock splits, dividends, combinations and other similar transactions).  In addition, while this Feb 20 Note is outstanding and to the extent the Company grants any other party a more favorable note with a face value equal to or less than the face value of this Feb 20 Note, at the Feb 20 Note holder’s option, the terms of the Feb 20 Note shall adjust to match that more favorable note including the conversion price, if applicable.

 

On February 23, 2018, the Company entered into a securities purchase agreement with an accredited investor pursuant to which it sold and issued an unsecured convertible promissory note (the “Feb 23 Note”), in the aggregate principal face amount of $78,750. The Feb 23 Note matures 12 months from the date of issuance and bears interest at a rate of 10% per annum. The Feb 23 Note may be converted into shares of the Company’s common stock at a price per share equal to the lessor of (i) $0.03 or (ii) 50% of the lowest trade price of the Company’s common stock recorded during the twenty prior trading days from receipt of the conversion notice (subject to adjustment for stock splits, dividends, combinations and other similar transactions).  In addition, while this Feb 23 Note is outstanding and to the extent the Company grants any other party a more favorable note with a face value equal to or less than the face value of this Feb 23 Note, the conversion price terms of the Feb 23 Note shall adjust to match that more favorable conversion price. 

 

On April 4, 2018, the Company entered into a securities purchase agreement