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EX-32 - CERTIFICATION - ORIGINCLEAR, INC.f10q0618ex-32_originclear.htm
EX-31 - CERTIFICATION - ORIGINCLEAR, INC.f10q0618ex-31_originclear.htm
EX-3.1 - CERTIFICATE OF AMENDMENT TO ARTICLES OF INCORPORATION FILED WITH THE SECRETARY O - ORIGINCLEAR, INC.f10q0618ex3-1_originclear.htm

 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

Form 10-Q

 

(Mark One)

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

 

FOR THE QUARTERLY PERIOD ENDED:  June 30, 2018

 

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

 

For the transition period from __________ to __________

 

Commission File Number: ________________

 

ORIGINCLEAR, INC.

(Exact name of registrant as specified in its charter)

 

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

 

525 S. Hewitt St.

Los Angeles, CA 90013

(Address of principal executive offices, Zip Code)

 

(323) 939-6645

(Registrant’s telephone number, including area code)

 

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

 

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

 

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

   

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 ☒

 

Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date. As of August 13, 2018 there were 190,323,814 shares of common stock, par value $0.0001 per share, issued and outstanding.

 

 

 

 

 

 

TABLE OF CONTENTS

 

    Page
PART I
     
Item 1. Financial Statements. 2
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations. 21
Item 3. Quantitative and Qualitative Disclosures About Market Risk. 29
Item 4. Controls and Procedures. 29
     
PART II  
     
Item 1. Legal Proceedings. 31
Item 1A. Risk Factors. 31
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds. 31
Item 3. Defaults Upon Senior Securities. 31
Item 4. Mine Safety Disclosures. 31
Item 5. Other Information. 31
Item 6. Exhibits. 31
     
SIGNATURES 32

 

 

 

 

PART I - FINANCIAL INFORMATION

 

This Quarterly Report includes forward-looking statements within the meaning of the Securities Exchange Act of 1934 (the “Exchange Act”). These statements are based on management’s beliefs and assumptions, and on information currently available to management. Forward-looking statements include the information concerning our possible or assumed future results of operations set forth under the heading “Management’s Discussion and Analysis of Financial Condition or Plan of Operation.” Forward-looking statements also include statements in which words such as “expect,” “anticipate,” “intend,” “plan,” “believe,” “estimate,” “consider” or similar expressions are used.

 

Forward-looking statements are not guarantees of future performance. They involve risks, uncertainties and assumptions. Our future results and shareholder values may differ materially from those expressed in these forward-looking statements. Readers are cautioned not to put undue reliance on any forward-looking statements.

 

 1 

 

 

Item 1. Financial Statements.

 

ORIGINCLEAR, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED BALANCE SHEETS

 

   June 30,
2018
   December 31,
2017
 
   (Unaudited)     
ASSETS        
CURRENT ASSETS        
Cash  $438,533   $439,822 
Contracts receivable, less allowance for doubtful accounts of $6,996 and $6,996 respectively   478,651    490,441 
Convertible note receivable   80,867    - 
Inventory   13,737    13,614 
Prepaid expenses and other assets   50,635    61,607 
Contract assets   221,971    88,589 
Work in progress   84,157    84,157 
           
TOTAL CURRENT ASSETS   1,368,551    1,178,230 
           
NET PROPERTY AND EQUIPMENT   179,543    150,628 
           
OTHER ASSETS          
Fair value investment - securities   

116,200

    - 
Other asset   19,538    19,538 
Trademark   4,467    4,467 
Security deposit   3,500    3,500 
           
TOTAL OTHER ASSETS   143,705    27,505 
           
TOTAL ASSETS  $1,691,799   $1,356,363 
           
LIABILITIES AND SHAREHOLDERS’ DEFICIT          
           
Current Liabilities          
Accounts payable and other payable  $1,150,777   $827,656 
Accrued expenses   1,156,241    932,092 
Contract liabilities   328,937    154,048 
Capital lease, current portion   

9,088

    - 
Customer deposit   113,950    113,950 
Warrant reserve   20,000    20,000 
Deferred income   62,879    15,500 
Loans payable, truck   2,655    11,090 
Loans payable, related party   248,870    - 
Derivative liabilities   13,721,860    5,531,183 
Convertible promissory notes, net of discount of $408,366 and $591,835, respectively   970,328    766,931 
           
Total Current Liabilities   17,785,585    8,372,450 
           
Long Term Liabilities           
Capital lease, long term portion   31,462    - 
Loan payable, long term portion   -    4,609 
Convertible promissory notes, net of discount of $61,225 and $0, respectively   2,923,899    2,811,000 
           
Total Long Term Liabilities   2,955,361    2,815,609 
           
Total  Liabilities   20,740,946    11,188,059 
           
COMMITMENTS AND CONTINGENCIES (See Note 11)          
           
SHAREHOLDERS’ DEFICIT          
Preferred stock, $0.0001 par value, 550,000,000 shares authorized 3,333 shares of Series B issued and outstanding, respectively   1    1 
1,000 shares of Series C issued and outstanding, respectively   -    - 
15,805,554 shares of Series D issued and outstanding, respectively   1,581    - 
Common stock, $0.0001 par value, 2,000,000,000 shares authorized 152,535,223 and 112,888,964 equity shares issued and outstanding, respectively   15,254    11,289 
Preferred treasury stock, 1,000 and 1,000 shares outstanding, respectively   -    - 
Additional paid in capital   60,041,493    58,618,560 
Accumulated other comprehensive loss   (134)   (134)
Accumulated deficit   (79,107,342)   (68,461,412)
           
TOTAL SHAREHOLDERS’ DEFICIT   (19,049,147)   (9,831,696)
           
TOTAL LIABILITIES AND SHAREHOLDERS’ DEFICIT  $1,691,799   $1,356,363 

 

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

 2 

 

 

ORIGINCLEAR, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

FOR THE THREE AND SIX MONTHS ENDED JUNE 30, 2018 AND 2017

(Unaudited)

 

   Three Months Ended   Six Months Ended 
   June 30,
2018
   June 30,
2017
   June 30,
2018
   June 30,
2017
 
                 
Sales  $1,250,604   $510,325   $2,584,143   $1,182,454 
                     
Cost of Goods Sold   1,056,906    499,222    2,016,572    1,081,678 
                     
Gross Profit   193,698    11,103    567,571    100,776 
                     
Operating Expenses                    
Selling and marketing expenses   541,761    1,112,437    865,583    1,625,238 
General and administrative expenses   666,964    446,570    1,371,693    1,012,369 
Research and development   74,524    28,990    118,063    82,643 
Depreciation and amortization expense   

14,757

    12,945    

29,118

    26,545 
                     
Total Operating Expenses   1,298,006    1,600,942    2,384,457    2,746,795 
                     
Loss from Operations   (1,104,308)   (1,589,839)   (1,816,886)   (2,646,019)
                     
OTHER INCOME (EXPENSE)                    
Other income   30,867    -    30,867    - 
Unrealized loss on investment securities   (13,800)        (13,800)     
Gain on sale of asset   (406)   -    (406)   - 
Commitment fee   (164,043)   (614,872)   (384,326)   (673,603)
Loss on conversion of debt   (137,460)   (616,481)   (263,790)   (616,481)
Gain/(Loss) on net change in derivative liability   3,930,428    (549,154)   (7,741,115)   522,942 
Interest expense   (298,892)   (179,264)   (456,474)   (369,002)
                     
TOTAL OTHER INCOME (EXPENSE)   3,346,694    (1,959,771)   (8,829,044)   (1,136,144)
                     
NET INCOME (LOSS)  $2,242,386   $(3,549,610)  $(10,645,930)  $(3,782,163)
                     
BASIC AND DILUTED LOSS PER SHARE ATTRIBUTABLE TO SHAREHOLDERS’  $0.016   $(0.095)  $(0.080)  $(0.121)
                     
WEIGHTED-AVERAGE COMMON SHARES OUTSTANDING, BASIC AND DILUTED   143,826,219    37,190,563    133,501,554    31,172,291 

 

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

 

 3 

 

 

ORIGINCLEAR, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENT OF SHAREHOLDERS’ DEFICIT

FOR THE SIX MONTHS ENDED JUNE 30, 2018

 

                   Additional   Accumulated
Other
         
   Preferred stock   Common stock   Paid-in   Comprehensive   Accumulated     
   Shares   Amount   Shares   Amount   Capital   loss   Deficit   Total 
Balance at December 31, 2017   4,333   $1    112,888,964   $11,289   $58,618,560   $(134)  $(68,461,412)  $(9,831,696)
                                         
Common stock issuance for conversion of debt and accrued interest   -    -    13,193,638    1,320    381,213    -    -    382,533 
                                         
Common stock issued at fair value for services   -    -    26,452,621    2,645    750,269    -    -    752,914 
                                  -      
Series D Preferred stock issued through a private placement   15,805,554    1,581    -    -    278,419    -    -    280,000 
                                         
Stock option compensation cost   -    -    -    -    13,032    -    -    13,032 
                                         
Net loss   -    -    -    -    -    -    (10,645,930)   (10,645,930)
                                         
Balance at June 30, 2018 (unaudited)   15,809,887   $1,582    152,535,223    15,254    60,041,493    (134)   (79,107,342)   (19,049,147)

 

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

 

 4 

 

 

ORIGINCLEAR, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

FOR THE SIX MONTHS ENDED JUNE 30, 2018 AND 2017

(Unaudited)

  

   Six Months Ended 
   June 30,
2018
   June 30,
2017
 
CASH FLOWS FROM OPERATING ACTIVITIES:          
Net loss  $(10,645,930)  $(3,782,163)
Adjustment to reconcile net loss to net cash used in operating activities          
Depreciation and amortization   29,118    26,545 
Common stock and warrants issued for services   752,914    2,008,893 
Stock option and warrant compensation expense   13,032    52,602 
(Gain)/Loss on net change in valuation of derivative liability   7,741,115    (522,942)
Loss on conversion of debt   263,790    616,481 
Debt discount recognized as interest expense   218,529    211,734 
Loss on sale of asset   406    - 
Net unrealized loss on fair value of securities   13,800    - 
Change in Assets (Increase) Decrease in:          
Contracts receivable   (18,210)   (49,775)
Prepaid expenses and other assets   10,972    24,451 
Contract assets   (133,382)   30,303 
Inventory asset   (123)   (13,614)
Change in Liabilities Increase (Decrease) in:          
Accounts payable   323,121    162,978 
Accrued expenses   255,605    60,782 
Contract liabilities   174,889    243,621 
Deferred income   47,379    22,300 
           
NET CASH USED IN OPERATING ACTIVITIES   (952,975)   (907,804)
           
CASH FLOWS USED FROM INVESTING ACTIVITIES:          
Fair value investment - security   (100,000)   - 
Convertible note receivable   (80,000)   - 
Proceeds from sale of asset   2,000    - 
Purchase of fixed assets   (15,000)   (33,845)
           
CASH USED IN INVESTING ACTIVITIES   (193,000)   (33,845)
           
CASH FLOWS FROM FINANCING ACTIVITIES:          
Payment for capital lease   (4,890)   - 
Loan payable, truck   (13,044)   29,173 
Loan payable, related party   248,870    - 
Proceeds from convertible promissory notes   633,750    - 
Proceeds for issuance of common stock for cash   280,000    835,750 
           
NET CASH PROVIDED BY FINANCING ACTIVITIES   1,144,686    864,923 
           
Foreign currency effect on cash flow   -    (40)
           
NET DECREASE IN CASH   (1,289)   (76,766)
           
CASH BEGINNING OF PERIOD   439,822    351,321 
           
CASH END OF PERIOD  $438,533   $274,555 
           
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION          
Interest paid  $72,531   $1,395 
Taxes paid  $-   $- 
           
SUPPLEMENTAL DISCLOSURES OF NON CASH TRANSACTIONS          
Common stock issued at fair value for conversion of debt and accrued interest  $382,533   $953,879 
Common stock issued at fair value on settlement of accounts payable  $-   $117,931 
Common stock issued at fair value for supplemental shares  $382,747   $673,603 
Capitalized leased asset  $45,440   $- 

  

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

 5 

 

 

ORIGINCLEAR, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS-UNAUDITED

JUNE 30, 2018

 

1. The accompanying unaudited condensed financial statements of OriginClear, Inc. (the “Company”) (formerly OriginOil, Inc.) have been prepared in accordance with accounting principles generally accepted in the United States of America for interim financial information and with the instructions to Form 10-Q and Rule 10-01 of Regulation S-X.  Accordingly, they do not include all of the information and footnotes required by generally accepted accounting principles for complete financial statements. In the opinion of management, all normal recurring adjustments considered necessary for a fair presentation have been included.  Operating results for the six months ended June 30, 2018 are not necessarily indicative of the results that may be expected for the year ending December 31, 2018.  For further information refer to the financial statements and footnotes thereto included in the Company’s Form 10-K for the year ended December 31, 2017.

 

Going Concern

The accompanying unaudited condensed financial statements have been prepared on a going concern basis of accounting, which contemplates continuity of operations, realization of assets and liabilities and commitments in the normal course of business.  The accompanying unaudited condensed financial statements do not reflect any adjustments that might result if the Company is unable to continue as a going concern. The Company’s revenue is not yet sufficient to cover its operating expenditures and has negative cash flows from operations, which raise substantial doubt about the Company’s ability to continue as a going concern. The ability of the Company to continue as a going concern and appropriateness of using the going concern basis is dependent upon, among other things, additional cash infusion. Management believes the existing shareholders, the prospective new investors, current and future sales will provide the additional cash needed to meet the Company’s obligations as they become due, and will allow the development of its core business operations. No assurance can be given that any future financing will be available or, if available, that it will be on terms that are satisfactory to the Company. Even if the Company is able to obtain additional financing, it may contain undue restrictions on our operations, in the case of debt financing, or cause substantial dilution for our stockholders, in case of equity financing.

 

2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICES

 

This summary of significant accounting policies of the Company is presented to assist in understanding the Company’s financial statements. The financial statements and notes are representations of the Company’s management, which is responsible for their integrity and objectivity. These accounting policies conform to accounting principles generally accepted in the United States of America and have been consistently applied in the preparation of the financial statements.

 

Principles of Consolidation

The accompanying unaudited condensed consolidated financial statements include the accounts of OriginClear, Inc. and its wholly owned operating subsidiaries, Progressive Water Treatment, Inc., and OriginClear Technology Limited. All material intercompany transactions have been eliminated upon consolidation of these entities.

 

Loss per Share Calculations

Basic loss per share calculations are computed by dividing income (loss) available to common shareholders by the weighted-average number of common shares available. Diluted earnings per share is computed similar to basic earnings per share except that the denominator is increased to include securities or other contracts to issue common stock that would have been outstanding if the potential common shares had been issued and if the additional common shares were dilutive.

 

The Company has excluded 3,679,637 of stock options, 17,985,380 warrants, and the shares issuable from convertible debt of $4,363,818 and shares issuable from convertible preferred stock for the six months ended June 30, 2018, because their impact on the loss per share is anti-dilutive.

 

The Company has excluded 3,697,495 of stock options, 474,335 warrants, and the shares issuable from convertible debt of $3,667,068 and shares issuable from convertible preferred stock for the six months ended June 30, 2017, because their impact on the loss per share is anti-dilutive.

 

Use of Estimates

The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities, disclosure of contingent assets and liabilities at the date of the financial statements, and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. Significant estimates include estimates used to review the Company’s impairments and estimations of long-lived assets, revenue recognition on percentage of completion type contracts, allowances for uncollectible accounts, warranty reserves, inventory valuation, debt beneficial conversion features, fair value investments, valuations of non-cash capital stock issuances and the valuation allowance on deferred tax assets. The Company bases its estimates on historical experience and on various other assumptions that 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.

 

 6 

 

 

ORIGINCLEAR, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS-UNAUDITED

JUNE 30, 2018

 

2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICES (Continued)

 

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.

 

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.

 

Revenue Recognition

We recognize revenue when services are performed, and at the time of shipment of products, provided that evidence of an arrangement exists, title and risk of loss have passed to the customer, fees are fixed or determinable, and collection of the related receivable is reasonably assured.

 

Revenues and related costs on construction contracts are recognized as the performance obligations for work are satisfied over time in accordance with Accounting Standards Codification (“ASC”) 606, Revenue from Contracts with Customers. Under ASC 606, revenue and associated profit, will be recognized as the customer obtains control of the goods and services promised in the contract (i.e., performance obligations). All un-allocable indirect costs and corporate general and administrative costs are charged to the periods as incurred. However, in the event a loss on a contract is foreseen, the Company will recognize the loss as it is determined.

 

Revisions in cost and profit estimates during the course of the contract are reflected in the accounting period in which the facts for the revisions become known. Provisions for estimated losses on uncompleted contracts are made in the period in which such losses are determined. Changes in job performance, job conditions, and estimated profitability, including those arising from contract penalty provisions, and final contract settlements, may result in revisions to costs and income, which are recognized in the period the revisions are determined.

 

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

 

Contract Receivable

The Company bills its customers in accordance with contractual agreements. The agreements generally require billing to be on a progressive basis as work is completed. Credit is extended based on evaluation of clients financial condition and collateral is not required. The Company maintains an allowance for doubtful accounts for estimated losses that may arise if any customer is unable to make required payments. Management performs a quantitative and qualitative review of the receivables past due from customers on a monthly basis. The Company records an allowance against uncollectible items for each customer after all reasonable means of collection have been exhausted, and the potential for recovery is considered remote. The allowance for doubtful accounts was approximately $6,996 as of June 30, 2018 and December 31, 2017, respectively. The net contract receivable balance was $478,651 and $490,441 at June 30, 2018 and December 31, 2017, respectively.

 

Fair Value of Financial Instruments

Fair Value of Financial Instruments, requires disclosure of the fair value information, whether or not recognized in the balance sheet, where it is practicable to estimate that value. As of June 30, 2018, 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.

 

 7 

 

 

ORIGINCLEAR, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS-UNAUDITED

JUNE 30, 2018

 

2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICES (Continued)

 

Fair Value of Financial Instruments (Continued)

 

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 and liabilities measured and recorded at fair value on the Company’s balance sheets on a recurring basis and their level within the fair value hierarchy as of June 30, 2018.

 

     Total   (Level 2)   (Level 2)   (Level 3) 
                   
  Investment at fair value-securities  $116,200   $-   $-   $116,200 
                       
  Total Assets measured at fair value  $116,200   $-   $-   $116,200 

  

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

 

  Balance as of May 17, 2018  $130,000 
  Net unrealized loss on assets   (13,800)
  Balance as of June 30, 2018  $116,200 

  

     Total   (Level 2)   (Level 2)   (Level 3) 
                   
  Derivative Liability  $13,721,860   $-   $-   $13,721,860 
                               
  Total liabilities measured at fair value  $13,721,860   $-   $-   $13,721,860 

 

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, 2018  $5,531,183 
  Fair Value of derivative liabilities issued   449,562 
  Loss on conversion of debt and change in derivative liability   7,741,115 
  Balance as of June 30, 2018   13,721,860 

 

 8 

 

 

ORIGINCLEAR, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS-UNAUDITED

JUNE 30, 2018

 

2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICES (Continued)

 

Fair Value of Financial Instruments (Continued)

 

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

 

        6/30/2018  
  Risk free interest rate     1.77% - 2.63%  
  Stock volatility factor     50.68% - 219.0%  
  Weighted average expected option life     6 months - 5 years  
  Expected dividend yield     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.

 

Marketable Securities

The Company adopted ASU 2016-01, “Financial Instruments – Recognition and Measurement of Financial Assets and Financial Liabilities.” ASU 2016-01 requires investments (except those accounted for under the equity method of accounting, or those that result in consolidation of the investee) to be measured at fair value with changes in fair value recognized in net income. It requires public business entities to use the exit price notion when measuring the fair value of financial instruments for disclosure purpose, and separate presentation of financial assets and financial liabilities by measurement category and form of financial asset. It eliminates the requirement for public business entities to disclose the method(s) and significant assumptions used to estimate the fair value that is required to be disclosed for financial instruments measured at amortized cost. The Company has evaluated the potential impact this standard may have on the condensed consolidated financial statements and determined that it had a significant impact on the condensed consolidated financial statements. The Company accounts for its investment in Water Technologies International, Inc. as available-for-sale securities, and the unrealized gain on the available-for-sale securities is recognized in net income.

 

Licensing agreement

The Company analyzed the licensing agreement using ASU 606 to determine the timing of revenue recognition. The licensing of the intellectual property is distinct from the non-license goods or services and has significant standalone functionality that provides a benefit or value. The functionality will not change during the license period due to the licensor’s activities. Because the significant standalone functionality is delivered immediately, the revenue is generally recognized when the license is delivered.

 

Recently Issued Accounting Pronouncements

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

 

In 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.

 

In May 2014, the FASB issued ASU 2014-09, Revenue from Contracts with Customers (ASC 606), to clarify the principles of recognizing revenue and create common revenue recognition guidance between U.S. GAAP and International Financial Reporting Standards. Under ASC 606, revenue is recognized when a customer obtains control of promised goods or services and is recognized at an amount that reflects the consideration expected to be received in exchange for such goods or services. In addition, ASC 606 requires disclosure of the nature, amount, timing, and uncertainty of revenue and cash flows arising from contracts with customers. The ASC is effective for fiscal years beginning after December 15, 2017. The Company has adopted ASC 606 beginning on January 1, 2018. The adoption of ASC 606 did not have a significant impact on the Company’s revenue recognition policies. See Note 7 for additional disclosures in accordance with the new revenue recognition standard.

 

 9 

 

 

ORIGINCLEAR, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS-UNAUDITED

JUNE 30, 2018

 

2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICES (Continued)

 

Recently Issued Accounting Pronouncements (Continued)

 

The Company adopted ASU 2016-01, “Financial Instruments - Overall: Recognition and Measurement of Financial Assets and Financial Liabilities.” ASU 2016-01 requires equity investments (except those accounted for under the equity method of accounting, or those that result in consolidation of the investee) to be measured at fair value with changes in fair value recognized in net income, requires public business entities to use the exit price notion when measuring the fair value of financial instruments for disclosure purposes, requires separate presentation of financial assets and financial liabilities by measurement category and form of financial asset, and eliminates the requirement for public business entities to disclose the method(s) and significant assumptions used to estimate the fair value that is required to be disclosed for financial instruments measured at amortized cost. The Company has evaluated the potential impact this standard may have on the condensed consolidated financial statements and determined that it had a significant impact on the condensed consolidated financial statements.

 

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

 

3.

CAPITAL STOCK

 

Preferred Stock

On April 11, 2018, the Board of Directors authorized an increase in shares of preferred stock, par value $0.0001 per share to 550,000,000 shares from 750,000 shares. On April 13, 2018, the Board adopted a Certificate of Designation establishing the rights, preferences, privileges and other terms of Series D preferred stock and Series D-1 preferred stock, par value $0.0001 per share. The Board authorized and approved 400,000,000 shares of Series D and 50,000,000 shares of Series D-1 preferred stock.

 

Series B

On October 1, 2015, the Company filed a Certificate of Designation for Series B preferred stock with the Secretary of State of Nevada and the shares of Series B preferred stock 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 set forth in Section 1.2 of the agreement shall 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. See Note 3. 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. As of June 30, 2018, there are 3,333 shares of Series B preferred stock outstanding.

 

Series C

On March 14, 2017, the Board of Directors authorized the issuance of 1,000 shares of Series C preferred stock, par value $0.0001 per share, to T. Riggs Eckelberry in exchange for his continued employment with the Company. The purchase price of the Series C preferred stock was $0.0001 per share representing a total purchase price of $0.10 for 1,000 shares.

 

 10 

 

 

ORIGINCLEAR, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS-UNAUDITED

JUNE 30, 2018

 

3. CAPITAL STOCK (Continued)

 

Preferred Stock (Continued)

 

Series D

On April 13, 2018, the Board adopted resolutions creating a series of shares of convertible preferred stock designated as 0% Series D preferred stock (the “Series D Preferred Stock”) with a par value of $0.0001. The shares of Series D Preferred Stock do not have a dividend rate or liquidation preference and do not carry any voting rights. The purchase price shall be $0.02 per unit for an aggregate investment amount of less than $50,000; $0.018 for an aggregate amount of $50,000 or greater, but less than $100,000; $0.016 for an aggregate amount of $100,000 or greater, but less than $250,000; $0.014 for an aggregate amount of $250,000 or greater. 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 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.

 

As of June 30, 2018, the Company issued 15,805,554 shares of Series D preferred stock, through a private placement for cash value of $280,000 at prices ranging from $0.016 to $0.02.

 

Series D-1

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

 

Common Stock

 

On April 13, 2018, the Company filed a Certificate of Amendment to its Articles of Incorporation, as amended, with the Secretary of State of the State of Nevada to effectuate an increase to the number of authorized shares of common stock of the Company to 2,000,000,000 from 900,000,000.

 

Six months ended June 30, 2018

 

The Company issued 13,193,638 shares of common stock for the settlement of convertible promissory notes for an aggregate principal amount of $88,000, plus interest in the amount of $30,743, with an aggregate fair value loss on conversion of debt in the amount of $263,790, based upon conversion prices of $0.019 to $0.0329.

 

The Company issued 26,452,621 shares of common stock for services at fair value of $752,914.

 

4. CONVERTIBLE PROMISSORY NOTES

 

As of June 30, 2018, the outstanding convertible promissory notes are summarized as follows:

 

  Convertible Promissory Notes, net of debt discount   $ 3,894,227  
  Less current portion     970,328  
  Total long-term liabilities   $ 2,923,899  

 

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

 

  Period Ending June 30,  Amount 
  2020   2,414,775 
  2021   325,000 
  2022   - 
  2023   184,124 
     $2,923,899 

 

 11 

 

 

ORIGINCLEAR, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS-UNAUDITED

JUNE 30, 2018

 

4. CONVERTIBLE PROMISSORY NOTES (Continued)

 

At June 30, 2018, the $4,363,818 in convertible promissory notes has a remaining debt discount of $469,591, leaving a net balance of $3,894,227. 

 

On various dates, the Company issued unsecured convertible promissory notes (the “Notes”), that matured during the period and were extended sixty (60) days from the effective date of each Note. The Notes bear interest at 10% per 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 six months ended June 30, 2018, the Company issued 13,193,638 shares of common stock, upon conversion of $88,000 in principal, plus accrued interest of $30,743, with a fair value loss on settlement of $263,790. As of June 30, 2018, the Notes had an aggregate remaining balance of $1,398,000.

 

As of June 30, 2018, the unsecured convertible promissory notes (the “OID Notes”) had an aggregate remaining principal balance of $184,124, plus accrued interest of $13,334. 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 through June 30, 2023. The OID Notes were convertible into shares of the Company’s common stock at a conversion price initially of $15.31. After the amendment, the conversion price changed to the lesser of $2.80 per share, or b) fifty percent (50%) of the lowest trade price of common stock recorded since the original effective date of this note, or c) the lowest effective price per share granted to any person or entity after the effective date.  The conversion feature of the notes was considered a derivative in accordance with current accounting guidelines, because of the reset conversion features of the notes.

 

The Company issued various, unsecured convertible promissory notes (the “May 2016 Notes”), on various dates ending on May 19, 2016. The May 2016 Notes matured and were extended from the date of each tranche through maturity dates ending on May 19, 2020. The May 2016 Notes bear interest at 10% per annum. The May 2016 Notes may be converted into shares of the Company’s common stock at conversion prices ranging from the lesser of $0.70 to $2.80 (subject to adjustment for stock splits, dividends, combinations and other similar transactions) or 50% of the lowest trade price on any trade day following issuance of the May 2016 Notes.  The conversion feature of the May 2016 Notes was considered a derivative in accordance with current accounting guidelines because of the reset conversion features of the May 2016 Notes. The remaining balance of the May 2016 Notes as of June 30, 2018, was $1,325,000.

 

The Company issued a convertible note (the “Dec 2015 Note”) in exchange for an accounts payable in the amount of $432,048, which could be converted into shares of the Company’s common stock after December 31, 2015. The Dec 2015 Note was accounted for under ASC 470, whereby, a beneficial conversion feature was recorded at time of issuance. The Dec 2015 Note did not meet the criteria of a derivative, and was accounted for as a beneficial conversion feature, which was amortized over the life of the Dec 2015 Note and recognized as interest expense in the financial statements. On January 1, 2016, the Dec 2015 Note met the criteria of a derivative and was accounted for under ASC 815. The Dec 2015 Note has zero stated interest rate, and the conversion price shall be equal to 75% of the average three lowest last sale prices traded during the 25 trading days immediately prior to conversion. As of June 30, 2018, the remaining balance of the Dec 2015 Note was $167,048.

 

The Company issued a convertible note (the “Sep 2016 Note”) in exchange for an accounts payable in the amount of $430,896, which could be converted into shares of the Company’s common stock after September 15, 2016. The Sep 2016 Note was accounted for under ASC 470, whereby, a beneficial conversion feature was recorded at time of issuance. On September 15, 2016, the Sep 2016 Note met the criteria of a derivative and was accounted for under ASC 815. The Sep 2016 Note has zero stated interest rate, and the conversion price shall be equal to 75% of the average three lowest last sale prices traded during the 25 trading days immediately prior to conversion. The Sep 2016 Note did not meet the criteria of a derivative at the time it was entered into, and was accounted for as a beneficial conversion feature, which was amortized over the life of the Sep 2016 Note and recognized as interest expense in the financial statements. The conversion feature of the Sep 2016 Note was considered a derivative in accordance with current accounting guidelines because of the reset conversion feature of the Sep 2016 Note. The Company recorded amortization of debt discount, which was recognized as interest expense in the amount of $93,181 during the six months ended June 30, 2018.

 

The Company issued an unsecured convertible promissory 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 $0.05 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 $22,279 during the six months ended June 30, 2018. 

 

 12 

 

 

ORIGINCLEAR, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS-UNAUDITED

JUNE 30, 2018

 

4. CONVERTIBLE PROMISSORY NOTES (Continued)

 

The Company issued an unsecured convertible promissory 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 $4,489 during the six months ended June 30, 2018.

 

The Company issued various unsecured convertible promissory notes (the “Jan-Jun 2018 Notes”), in the aggregate amount of $255,000 on various dates from January 24, 2018 thru June 7, 2018. The Jan-Jun 2018 Notes mature on various dates from January 24, 2019 thru June 7, 2019. The Jan-Jun 2018 Notes bear interest at 10% per annum. The Jan-Jun 2018 Notes may be converted into shares of the Company’s common stock at a variable conversion price of 61% of the lowest one (1) trading day during the ten (10) trading days prior to conversion. The conversion feature of the Jan-Jun 2018 Notes was considered a derivative in accordance with current accounting guidelines because of the reset conversion features of the Jan-Jun 2018 Notes. The Company recorded amortization of debt discount, which was recognized as interest expense in the amount of $56,495 during the six months ended June 30, 2018. 

 

The Company issued two unsecured convertible promissory notes (the “Feb 2018 Notes”), in the aggregate principal amount of $157,500 (each in the amount of $78,750) on February 23, 2018. The Notes mature on February 23, 2019, and bear interest at 10% per annum. The first of the two Feb 2018 Notes shall be paid for by the Buyer. The second of the two Feb 2018 Notes shall initially be paid for by the issuance of an offsetting $78,750 secured note issued to the Company by the Buyer. The first of the two Feb 2018 Notes was funded with cash and the Company must agree to the funding of the second of the two Feb Notes, before it can be funded with cash. The second of the two Feb 2018 Notes is secured by assets of the Buyer having a fair market value of at least $78,750. The Feb 2018 Notes may be converted into shares of the Company’s common stock at a conversion price of $0.03 or 50% discount of the lowest trading price during the twenty (20) trading days prior to conversion. The conversion feature of the Feb 2018 Notes was considered a derivative in accordance with current accounting guidelines because of the reset conversion features of the Feb 2018 Notes. The Company recorded amortization of debt discount, which was recognized as interest expense in the amount of $15,000 during the six months ended June 30, 2018. 

 

The Company issued two unsecured convertible promissory notes (the “Apr & May 2018 Notes”), in the aggregate amount of $300,000 on April 2, 2018 and May 31, 2018. The Apr & May 2018 Notes mature on April 2, 2019 and May 31, 2019, respectively. The Apr & May 2018 Notes bear interest at 10% per annum. The Apr & May 2018 Notes may be converted into shares of the Company’s common stock at a variable conversion price of 50% of the lesser of the lowest trading price twenty five (25) trading days prior to conversion. The conversion feature of the Apr & May 2018 Notes was considered a derivative in accordance with current accounting guidelines because of the reset conversion features of the Apr & May 2018 Notes. The Company recorded amortization of debt discount, which was recognized as interest expense in the amount of $27,086 during the six months ended June 30, 2018. 

 

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 June 30, 2018 was $13,721,860.

 

5.DERIVATIVE LIABILITIES

 

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

 

The convertible notes issued and described in Note 4 do not have fixed settlement provisions because their conversion prices are not fixed. The conversion feature has been characterized as derivative liabilities to be re-measured at the end of every reporting period with the change in value reported in the statement of operations.

 

 13 

 

 

ORIGINCLEAR, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS-UNAUDITED

JUNE 30, 2018

 

5.DERIVATIVE LIABILITIES (Continued)

 

During the six months ended June 30, 2018, as a result of the convertible notes (“Notes”) issued that were accounted for as derivative liabilities, we determined that the fair value of the conversion feature of the convertible notes at issuance was $449,562, based upon a Binomial-Model calculation. We recorded the full value of the derivative as a liability at issuance with an offset to valuation discount, which will be amortized over the life of the Notes.

 

During the six months ended June 30, 2018, the Company converted $88,000 in principal of convertible promissory notes, plus accrued interest of $30,743. As a result of the conversion of these notes and the change in fair value of the remaining notes, the Company recorded a loss on conversion of debt in the amount of $263,790 in the statement of operations for the six months ended June 30, 2018. At June 30, 2018, the fair value of the derivative liability was $13,721,860.

 

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

 

      6/30/2018  
  Risk free interest rate   1.77% - 2.63%  
  Stock volatility factor   50.68% - 219.0%  
  Weighted average expected option life   1 years - 5 years  
  Expected dividend yield   None  

 

6. OPTIONS AND WARRANTS

 

Options

 

The Board of Directors adopted Equity Incentive Stock Option Plans 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 3,614,285 shares of common stock. The Options granted under these plans may be either incentive options or nonqualified options and shall be administered by the Company’s Board of Directors.  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 Plans 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. Each option shall be exercisable to the nearest whole share, in installments or otherwise, as the respective option agreements may provide. The stock options mature on July 5, 2019 through October 17, 2021, at exercise prices of $1.31 and $6.65.

 

With respect to Non-Statutory Options granted to employees, directors or consultants, the Board of Directors or Committee of the Board of Directors 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 of Directors or Committee of the Board of Directors deems reasonable and appropriate.

 

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

 

     June 30, 2018 
         Weighted 
     Number of   average exercise 
      Options    price 
  Outstanding, beginning of period   3,697,495   $1.51 
  Granted   -    - 
  Exercised   -    - 
  Forfeited/Expired   (83,209)  $13.67 
  Outstanding, end of period   3,614,286   $1.21 
  Exercisable at the end of the period   2,654,346   $0.95 
  Weighted average fair value of options granted during the period       $- 

 

 14 

 

 

ORIGINCLEAR, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS-UNAUDITED

JUNE 30, 2018

 

6.

OPTIONS AND WARRANTS ( Continued)

 

Options (Continued)

 

The weighted average remaining contractual life of options outstanding issued under the Plan as of June 30, 2018 was as follows:

 

                    Weighted Average  
        Stock     Stock     Remaining  
  Exercisable     Options     Options     Contractual  
  Prices     Outstanding     Exercisable     Life (years)  
  $            6.65       18,572       18,572       1.00  
  $ 1.31       3,595,714       2,635,774       2.75 – 3.30  
            3,614,286       2,654,346          

 

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 six months ended June 30, 2018 and 2017 were $13,032 and $52,602, 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, Riggs Eckelberry, to create management incentives to improve the economic performance of the Company and to increase its value and stock price. All shares issuable under the RSGA are performance based shares and none have yet vested nor have any been issued. The RSGA provides for the issuance of up to 1,714,286 shares of the Company’s common stock to 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 857,143 shares of its common stock; b) If the Company’s consolidated operating profit (Operating Profit = Operating Revenue - Cost of Goods Sold - Operating Expenses - Depreciation & Amortization), calculated in accordance with generally accepted accounting principles, equals or exceeds $1,500,000 for the trailing twelve month period as reported as reported in the Company’s SEC Reports, the Company will issue up to 857,143 shares of its common stock. The Company has not recognized any costs associated with the milestones, due to not being able to estimate the probability of it being achieved. As the performance goals are achieved, the shares shall become eligible for vesting and issuance.

 

On August 10, 2016, the Company entered into a Restricted Stock Grant Agreement (the “August RSGA”) with Mr. 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. The Company has not recognized any costs associated with the milestones, due to not being able to estimate the probability of it being achieved. As the performance goals are achieved, the shares shall become eligible for vesting and issuance.

 

On May 16, 2018, the Company entered into a Restricted Stock Grant Agreement (the “May RSGA”) with Mr. Eckelberry, to create management incentives to improve the economic performance of the Company and to increase its value and stock price. All shares issuable under the May RSGA are performance based shares and none have yet vested nor have any been issued. The May RSGA provides for the issuance of up to 30,000,000 shares of the Company’s common stock to 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 15,000,000 shares of its common stock; b) If the Company’s consolidated operating profit (Operating Profit = Operating Revenue - Cost of Goods Sold - Operating Expenses - Depreciation & Amortization), calculated in accordance with generally accepted accounting principles, equals or exceeds $1,500,000 for the trailing twelve month period as reported as reported in the Company’s SEC Reports, the Company will issue up to 15,000,000 shares of its common stock. The Company has not recognized any costs associated with the milestones, due to not being able to estimate the probability of it being achieved. As the performance goals are achieved, the shares shall become eligible for vesting and issuance.

 

 15 

 

 

ORIGINCLEAR, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS-UNAUDITED

JUNE 30, 2018

 

6. OPTIONS AND WARRANTS (Continued)

 

Options (Continued)

 

Restricted Stock to Employees and Consultants

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

 

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

 

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

 

On November 10, 2017, the Company entered into a Restricted Stock Grant Agreement (the “Third Employee RSGA”) with 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 Third Employee RSGA are performance based shares and none have yet vested nor have any been issued. The Third Employee RSGA provides the issuance of up to 2,000,000 shares of the Company’s common stock provided certain milestones are met in certain stages; a) If the Company’s consolidated gross revenue, calculated in accordance with generally accepted accounting principles, consistently applied, equals or exceeds $15,000,000 for the trailing twelve month period, the Company will issue up to 1,000,000 shares of its common stock; b) If the Company’s consolidated operating profit (Operating Profit = Operating Revenue - Cost of Goods Sold - Operating Expenses - Depreciation & Amortization), calculated in accordance with generally accepted accounting principles, equals or exceeds $1,500,000 for the trailing twelve month period as reported as reported in the Company’s SEC Reports, the Company will issue up to 1,000,000 shares of its common stock. The Company has not recognized any costs associated with the milestones, due to not being able to

 

 16 

 

 

ORIGINCLEAR, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS-UNAUDITED

JUNE 30, 2018

 

6. OPTIONS AND WARRANTS (Continued)

 

Options (Continued)

 

estimate the probability of it being achieved. As the performance goals are achieved, the shares shall become eligible for vesting and issuance.

 

On May 16, 2018, the Company entered into a Restricted Stock Grant Agreement (the “Consultant and Employee RSGA”) with an employee and a consultant, to create management incentives to improve the economic performance of the Company and to increase its value and stock price. All shares issuable under the Consultant and Employee RSGA are performance based shares and none have yet vested nor have any been issued. The Consultant and Employee RSGA provides the issuance to each, of up to 2,000,000 shares of the Company’s common stock provided certain milestones are met in certain stages; a) If the Company’s consolidated gross revenue, calculated in accordance with generally accepted accounting principles, consistently applied, equals or exceeds $15,000,000 for the trailing twelve month period, the Company will issue to each consultant and employee up to 1,000,000 shares of its common stock; b) If the Company’s consolidated operating profit (Operating Profit = Operating Revenue - Cost of Goods Sold - Operating Expenses - Depreciation & Amortization), calculated in accordance with generally accepted accounting principles, equals or exceeds $1,500,000 for the trailing twelve month period as reported as reported in the Company’s SEC Reports, the Company will issue to each consultant and employee up to 1,000,000 shares of its common stock. The Company has not recognized any costs associated with the milestones, due to not being able to estimate the probability of it being achieved. As the performance goals are achieved, the shares shall become eligible for vesting and issuance.

 

Warrants

As of June 30, 2018, the Company issued no warrants during the period. A summary of the Company’s warrant activity and related information follows for the six months ended June 30, 2018:

 

     June 30, 2018 
         Weighted 
     Number   average 
     of   exercise 
     Warrants   price 
  Outstanding -beginning of the period   53,562,961   $5.40 
  Granted   -    - 
  Exercised   -    - 
  Forfeited   (36,491,858)  $(0.003)
  Outstanding - end of the period   17,071,103   $0.078 

 

At June 30, 2018, the weighted average remaining contractual life of warrants outstanding:

 

                    Weighted  
                    Average  
                    Remaining  
  Exercisable     Warrants     Warrants     Contractual  
  Prices     Outstanding     Exercisable     Life (years)  
  $ 0.08 - 0.12       17,062,312       17,062,312       0.42 – 0.92  
  $ 8.75 – 9.10       8,791       8,791       0.04 – 0.22  
            17,071,103       17,071,103          

 

At June 30, 2018, the aggregate intrinsic value of the warrants outstanding was $0.

 

7. REVENUE FROM CONTRACTS WITH CUSTOMERS

 

Equipment Contracts

Revenues and related costs on equipment contracts are recognized as the performance obligations for work are satisfied over time in accordance with Accounting Standards Codification (“ASC”) 606, Revenue from Contracts with Customers. Under ASC 606, revenue and associated profit, will be recognized as the customer obtains control of the goods and services promised in the contract (i.e., performance obligations). All un-allocable indirect costs and corporate general and administrative costs are charged to the periods as incurred. However, in the event a loss on a contract is foreseen, the Company will recognize the loss as it is determined.

 

 17 

 

 

ORIGINCLEAR, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS-UNAUDITED

JUNE 30, 2018

 

7. REVENUE FROM CONTRACTS WITH CUSTOMERS (Continued)

 

Equipment Contracts (Continued)

The following table represents a disaggregation of revenue by type of good or service from contracts with customers for the six months ended June 30, 2018 and 2017.

 

     Six Months Ended
June 30, 2018
 
     2018   2017 
           
  Equipment Contracts  $1,864,686   $687,622 
  Component Sales   624,564    452,557 
  Services Sales   49,286    32,275 
  Licensing Fees   45,607    10,000 
      2,584,143    1,182,454 

 

Revenue recognition for other sales arrangements, such as sales for components, service and licensing fees will remain materially consistent.

 

Contract assets represents revenues recognized in excess of amounts billed on contracts in progress. Contract liabilities represents billings in excess of revenues recognized on contracts in progress. Assets and liabilities related to long-term contracts are included in current assets and current liabilities in the accompanying balance sheets, as they will be liquidated in the normal course of the contract completion. The contract asset for the six months ending June 30, 2018 was $221,971 and for the year ending December 31, 2017 was $88,589. The contract liability for the six months ending June 30, 2018 was $328,937 and for the year ending December 31, 2017 was $154,048.

 

8.

FINANCIAL ASSETS  

 

Convertible Note Receivable  

The Company purchased a 10% convertible note in the amount of $80,000, through a private placement with Water Technologies International, Inc (“WTII”). The Note is convertible into common stock of WTII at a price of 65% of the lowest trading price for the ten (10) trading days immediately prior to the conversion date. The conversion price shall not be lower than a price of $0.0001 per share. As of June 30, 2018, the note included principal of $80,000 plus accrued interest of $867.

 

Fair value investment in Securities 

The Company purchased 10,000,000 shares of WTII stock through a private placement for cash of $100,000. ASU 2016-01 requires equity investments to be measured at fair value with changes in fair value recognized in net income. The Company measured the investment as of June 30, 2018 at fair value and recognized an unrealized loss of $17,000 in the financial statements.

 

On May 15, 2018, the Company received 4,000 shares of WTII preferred stock (the “Preferred Shares”) for the use of OriginClear, Inc. technology associated with their proprietary Electro Water Separation system. The Preferred Shares were valued at fair market value of $0.0075 for a total price of $30,000 on the date of issuance. The Preferred Shares are convertible into 4,000,000 shares of common stock of WTII. The Company analyzed the licensing agreement using ASU 606 to determine the timing of revenue recognition. The licensing of the intellectual property is distinct from the non-license goods or services and has significant standalone functionality that provides a benefit or value. The functionality will not change during the license period due to the licensor’s activities. Because the significant standalone functionality was delivered immediately, the revenue was recognized in the financial statements as of June 30, 2018. The license fee is amortized over three (3) years and an expense of $1,068 was recognized in the financial statements.

 

9.

CAPITAL LEASE

 

The Company entered into a capital lease for the purchase of equipment during the six months ended June 30, 2018. The lease is for a sixty (60) month term, with a purchase option at the end of the lease for $1.00

 

As of June 30, 2018, the maturities are summarized as follows:

 

  Capital lease  $40,550 
  Less current portion   9,088 
  Total long-term liabilities  $31,462 

  

 18 

 

 

ORIGINCLEAR, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS-UNAUDITED

JUNE 30, 2018

 

9. CAPITAL LEASE (Continued)

 

Long term maturities for the next four years are as follows:

 

  Period Ending June 30,  Amount 
  2019   4,544 
  2020   9,088 
  2021   9,088 
  2022   8,742 
     $31,462 

  

10. LOANS PAYABLE-RELATED PARTY

 

The Company’s CEO loaned the Company an aggregate of $248,870 during the period ended June 30, 2018. The loans bear interest at various rates to be repaid over a period of three (3) years at various maturity dates. The funds were used for operating expenses.

 

11. COMMITMENTS AND CONTINGENCIES

  

Operating Lease – Related Party

The Company maintains a month-to-month lease agreement with a shareholder of the Company for office space in McKinney, Texas at a base rent of $4,750 per month.

 

Operating Lease – Equipment

The Company entered into a five (5) year equipment lease in the amount of $45,440, which was recorded as a capital lease. There are no escalation or renewal options associated with this lease. The lease has a purchase option to buy the equipment at the end of the lease for one dollar ($1). The monthly lease payments are $757 per month. The future minimum lease payments due as June 30, 2018 is $40,551.

 

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.

 

12. 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:

 

Between July 9, 2018 and August 13, 2018, holders of convertible promissory notes converted an aggregate principal and interest amount of $150,006 into an aggregate of 32,478,855 shares of the Company’s common stock.

 

Between July 31, 2018 and August 9, 2018, the Company issued to consultants an aggregate of 4,428,058 shares of the Company’s common stock in lieu of cash considerations. 

 

In connection with certain one-time make good agreements, on July 31, 2018, the Company issued an aggregate of 881,678 shares of its common stock to certain holders of its common stock.

 

On August 9, 2018 the board of directors approved the issuance of an aggregate of 41,830,000 shares of the Company’s Series D-1 preferred stock to certain consultants and service providers of the Company for services rendered to the Company.

  

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ORIGINCLEAR, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS-UNAUDITED

JUNE 30, 2018

 

12. SUBSEQUENT EVENTS (Continued)

 

On August 9, 2018, the Company entered into Restricted Stock Grant Agreements (the “Aug Consultants RSGAs”) with four 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 Aug Consultants RSGAs are performance based shares and none have yet vested nor have any been issued. The Aug Consultants RSGAs provide the issuance of up to an aggregate of 8,500,000 shares of the Company’s common stock provided certain milestones are met in certain stages; a) If the Company’s consolidated gross revenue, calculated in accordance with generally accepted accounting principles, consistently applied, equals or exceeds $15,000,000 for the trailing twelve month period, the Company will issue to the consultants up to an aggregate of 4,250,000 shares of its common stock; b) If the Company’s consolidated operating profit (Operating Profit = Operating Revenue - Cost of Goods Sold - Operating Expenses - Depreciation & Amortization), calculated in accordance with generally accepted accounting principles, equals or exceeds $1,500,000 for the trailing twelve month period as reported as reported in the Company’s SEC Reports, the Company will issue to the consultants up to an aggregate of 4,250,000 shares of its common stock. As the performance goals are achieved, the shares shall become eligible for vesting and issuance.

 

On August 13, 2018, the Company filed a Certificate of Amendment to its Articles of Incorporation, as amended, with the Secretary of State of the State of Nevada to effectuate an increase to the number of authorized shares of common stock of the Company to 8,000,000,000 from 2,000,000,000. The number of authorized shares of all series of its preferred stock remains unchanged at 550,000,000. As a result of the increase of authorized shares of its common stock, the aggregate number of the Company’s authorized shares is 8,550,000,000.

 

 20 

 

 

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

 

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

 

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

 

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

 

Organizational History

 

OriginClear, Inc. (“we”, “us”, “our”, the “Company” or “OriginClear”) 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)

 

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.

 

 21 

 

 

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 consolidate the many small companies now benefiting from outsourcing. Recently, we created a new division, Modular Water Systems, which is commercializing the patented inventions of Dan Early, for a line of prefabricated water treatment systems and pump stations.
     
  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. 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.

  

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

 

Progressive Water Treatment 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. PWT reported revenue of $3,216,166 for the period ending December 31, 2017. For the first six months of 2018, PWT reported revenue of $2,445,646 which is included in the consolidated financial statements ending June 31, 2018.

 

 22 

 

 

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 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.

 

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.

 

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.

 

 23 

 

 

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.

 

Modular Water Systems: a product line of prefabricated water systems and pump stations.

 

On July 19, 2018, the Company announced Modular Water Systems (“MWS”) (www.modularwater.com), its new division that offers a unique product line of prefabricated water treatment systems. The Company has contracted with Daniel “Dan” Early P.E. (Professional Engineer) to commercialize his inventions. MWS is based at Progressive Water Treatment, Inc., OriginClear’s wholly-owned subsidiary, for its business operations and cost accounting, while functionally operating as a division of the Company.

 

Modular Water Systems business

 

MWS designs and delivers prefabricated wastewater treatment products to customers and end-users that must clean their own wastewater. It uses Structurally Reinforced Thermoplastic (SRTP) materials to focus on developing water and wastewater collection, conveyance, and treatment systems that have high performance and sustainability. Typical customers include schools, small communities, institutional facilities, real estate developments, factories, and industrial parks. Dan Early has pioneered the use of heavy reinforced plastic materials to create modular “water-systems-in-a-box”. Not only is reinforced thermoplastic faster and cheaper to build, but it can have three times the lifespan, or more, compared with concrete-and-steel construction. His inventions have led to the patented Wastewater System & Method which OriginClear has licensed exclusively for the world. In the words of Dan Early, “We believe our products set a de facto industry standard for performance and longevity. SRTP products are superior to typical concrete, steel and fiberglass construction for a myriad of reasons including durability, weight, life expectancy, corrosion resistance, water tightness, and ease of installation and maintenance.  SRTP based products are in my view the superior choice, with an estimated minimum useful service life of 100 years or longer. The civil infrastructure world needs product offerings that will double or triple the normal life cycle of conventional materials and result in substantial reductions in life cycle operational costs.”

 

MWS plans to largely subcontract its manufacturing to OriginClear’s subsidiary, Progressive Water Treatment of McKinney, Texas, before developing its own, in-house facilities. On July 25, 2018, MWS received its first purchase order for an order totaling $55,000.

 

WaterChain, Inc.

 

WaterChain, Inc. (Nevada) was incorporated on January 5, 2018 and is a wholly-owned subsidiary of OriginClear, Inc. OriginClear is a technology company, and WaterChain is our latest invention.

 

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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 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.

  

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 as the performance obligations for work are satisfied over time in accordance with Accounting Standards Codification (“ASC”) 606, Revenue from Contracts with Customers. Under ASC 606, revenue and associated profit, will be recognized as the customer obtains control of the goods and services promised in the contract (i.e., performance obligations). All un-allocable indirect costs and corporate general and administrative costs are charged to the periods as incurred. However, in the event a loss on a contract is foreseen, the Company will recognize the loss, as it is determined. The Contract Asset represents revenues recognized in excess of amounts billed on contracts in progress. The Contract Liability represents billings in excess of revenues recognized on contracts in progress. 

 

Use of Estimates

 

The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities, disclosure of contingent assets and liabilities at the date of the financial statements, and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. Significant estimates include estimates used to review the Company’s goodwill, impairments and estimations of long-lived assets, revenue recognition on percentage of completion type contracts, allowances for uncollectible accounts, inventory valuation, valuations of non-cash capital stock issuances and the valuation allowance on deferred tax assets. The Company bases its estimates on historical experience and on various other assumptions that are believed to be reasonable in the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. Actual results may differ from these estimates under different assumptions or conditions.

 

Fair Value of Financial Instruments

 

Fair value of financial instruments requires disclosure of the fair value information, whether or not recognized in the balance sheet, where it is practicable to estimate that value. As of June 30, 2018, the amounts reported for cash, prepaid expenses, accounts payable and accrued expenses approximate the fair value because of their short maturities.

 

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Recently Issued Accounting Pronouncements

 

Management reviewed accounting pronouncements issued during the three months ended June 30, 2018, and adopted pronouncement ASC 606, which management believes will not have a significant material impact on our present or future financial statements.

 

Results of Operations for the three months ended June 30, 2018 compared to the three months ended June 30, 2017.

 

Revenue and Cost of Sales

 

For the three months ended June 30, 2018, we had revenue of $1,250,604 compared to $510,325 for the three months ended June 30, 2017. Cost of sales for the three months ended June 30, 2018, was $1,056,906 compared to $499,222 for the three months ended June 30, 2017. Revenue and cost of sales increased primarily due to PWT operations.

 

Our gross profit was $193,698 and $11,103 for the three months ended June 30, 2018 and 2017, respectively.

  

Selling and Marketing Expenses

 

For the three months ended June 30, 2018, we had selling and marketing expenses of $541,761, compared to $1,112,437 for the three months ended June 30, 2017. The decrease in selling and marketing expenses was primarily due to a decrease in investor relations and marketing expense.

 

General and Administrative Expenses

 

General and administrative expenses increased to $666,964, for the three months ended June 30, 2018, compared to $446,570 for the three months ended June 30, 2017. The increase in general and administrative expenses was primarily due to an increase in professional fees.

 

Research and Development Cost

 

Research and development cost for the three months ended June 30, 2018 and 2017, were $74,524 and $28,990, respectively.  The increase in research and development costs was primarily due to an increase in salaries, outside services and other research and development costs.

 

Other Income and (Expenses)

 

Other income and (expenses) for the three months ended June 30, 2018 and 2017, were $3,346,694 and $(1,959,771), respectively. The increase in other income (expenses) was primarily a result of a change in gain of non-cash accounts associated with the fair value of the derivatives of $4,479,582, increase in interest expense of $119,628, which includes non-cash amortization of debt discount of $37,934, increase in other income of $30,867, increase in loss on sale of asset of $406, increase in unrealized loss on investment of $13,800, with an offset in loss on conversion of debt of $479,021, and commitment fees of $450,829.

  

Net Income/(Loss)

 

Our net income for the three months ended June 30, 2018 was $2,242,386, compared to a net loss of $(3,549,610) for the three months ended June 30, 2017. The majority of the increase in net income was due primarily to an increase in other expenses consisting of an increase in gain in non-cash accounts associated with derivatives along with an increase in revenue and gross profit, and other income and (expenses). 

 

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Results of Operations for the six months ended June 30, 2018 compared to the six months ended June 30, 2017.

 

Revenue and Cost of Sales

 

For the six months ended June 30, 2018, we had revenue of $2,584,143 compared to $1,182,454 for the six months ended June 30, 2017. Cost of sales for the six months ended June 30, 2018, was $2,016,572 compared to $1,081,678 for the six months ended June 30, 2017. Revenue and cost of sales increased primarily due to PWT operations.

 

Our gross profit was $567,571 and $100,776 for the six months ended June 30, 2018 and 2017, respectively.

  

Selling and Marketing Expenses

 

For the six months ended June 30, 2018, we had selling and marketing expenses of $865,583, compared to $1,625,238 for the six months ended June 30, 2017. The decrease in selling and marketing expenses was primarily due to a decrease in investor relations and marketing expense.

 

General and Administrative Expenses

 

General and administrative expenses increased to $1,371,693, for the six months ended June 30, 2018, compared to $1,012,369 for the six months ended June 30, 2017. The increase in general and administrative expenses was primarily due to increase in professional fees.

 

Research and Development Cost

 

Research and development cost for the six months ended June 30, 2018 and 2017, were $118,063 and $82,643, respectively.  The increase in research and development costs was primarily due to an increase in salaries, outside services and other research and development costs.

 

Other Income and (Expenses)

 

Other income and (expenses) for the six months ended June 30, 2018 and 2017, were $(8,829,044) and $(1,136,144), respectively. The increase in other income (expenses) was primarily a result of a change in gain of non-cash accounts associated with the fair value of the derivatives in the amount of $8,264,057, increase in other income of $30,867, increase in unrealized loss on investment securities of $13,800, increase in loss on sale of asset of $406, increase in interest expense of $87,472, which includes non-cash amortization of debt discount of $218,529, with an offset in commitment fees of $289,277, and loss on conversion of debt of $352,691.

  

Net Income/(Loss)

 

Our net loss for the six months ended June 30, 2018 was $(10,645,930), compared to a net loss of $(3,782,163) for the six months ended June 30, 2017. The majority of the increase in net loss was due primarily to an increase in other expenses consisting of a decrease in gain in non-cash accounts associated with derivatives along with other income and (expenses) offset by an increase in revenue and gross profit.  

 

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.

 

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The condensed consolidated financial statements have been prepared on a going concern basis of accounting, which contemplates continuity of operations, realization of assets and liabilities and commitments in the normal course of business.  The accompanying condensed consolidated financial statements do not reflect any adjustments that might result if the Company is unable to continue as a going concern. The Company has not generated significant revenue, and has negative cash flows from operations, which raise substantial doubt about the Company’s ability to continue as a going concern. The ability of the Company to continue as a going concern and appropriateness of using the going concern basis is dependent upon, among other things, additional cash infusion. We obtained funds from our shareholders during the six months ending June 30, 2018. Management believes the existing shareholders, prospective new investors and future sales will provide the additional cash needed to meet the Company’s obligations as they become due, and will allow the development of its core business operations. No assurance can be given that any future financing will be available or, if available, that it will be on terms that are satisfactory to the Company. Even if the Company is able to obtain additional financing, it may contain undue restrictions on our operations, in the case of debt financing, or cause substantial dilution for our stockholders, in case of equity financing.

  

At June 30, 2018 and December 31, 2017, we had cash of $438,533 and $439,822, respectively, and working capital deficit of $16,417,034 and $7,194,220, respectively.  The increase in working capital deficit was due primarily to an increase in non-cash derivative liabilities and convertible notes, accounts payable, accrued expenses, deferred income and capital lease with a decrease in cash, contracts receivable and prepaid expenses. 

 

During the first six months of 2018, we raised an aggregate of $633,750 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.

 

Net cash used in operating activities was $952,975 for the six months ended June 30, 2018, compared to $907,804 for the prior period ended June 30, 2017. The increase in cash used in operating activities was primarily due to increase in professional fees and marketing expense.

 

Net cash flows used in investing activities was $193,000 for the six months ended June 30, 2018, as compared to $33,845 for the prior period ended June 30, 2017. The net increase in cash used in investing activities was due to an increase in leased equipment in the current period, investment in securities, and investment in a convertible note receivable.

 

Net cash flows provided by financing activities was $1,144,686 for the six months ended June 30, 2018, as compared to $864,923 for the prior period ended June 30, 2017. The increase in cash provided by financing activities was due to an increase in loans payable and debt financing through convertible promissory notes. The convertible notes are convertible into shares of common stock, which have limitations on conversion. The lenders are limited to no more than a 4.99% beneficial ownership of the outstanding shares of common stock. Beneficial ownership is determined in accordance with Section 13(d) and 13(g) of the Securities Exchange Act of 1934, as amended ("Exchange Act"). To date we have principally financed our operations through the sale of our common stock and the issuance of debt.

 

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

 

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

 

Off-Balance Sheet Arrangements

 

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

  

Item 3.   Quantitative and Qualitative Disclosures About Market Risk.

 

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

 

Item 4.   Controls and Procedures.

 

Evaluation of Disclosure Controls and Procedures

  

Pursuant to Rules 13a-15(b) and 15-d-15(b) under the Exchange Act, the Company carried out an evaluation, with the participation of the Company's management, including the Company's Chief Executive Officer and Chief Financial Officer ("CEO/CFO") of the effectiveness of the Company's disclosure controls and procedures as of the end of the period covered by this report. The term "disclosure controls and procedures", as defined under Rules 13a-15(e) and 15d-15(e) under the Exchange Act, means controls and other procedures of a company that are designed to ensure that information required to be disclosed by a company in the reports that it files or submits under the Exchange Act is recorded, processed, summarized and reported, within the time periods specified in the SEC's rules and forms. Disclosure controls and procedures include, without limitation, controls and procedures designed to ensure that information required to be disclosed by a company in the reports that it files or submits under the Exchange Act is accumulated and communicated to the company's management, including its principal executive and principal financial officer, as appropriate to allow timely decisions regarding required disclosure.

 

As disclosed in our annual report filing for the year ended December 31, 2017, there was a significant deficiency in the Company's internal control over financial reporting due to a lack of segregation of duties due to small Company staff size. Based upon the evaluation of the disclosure controls at the end of the period covered by this report, the Company's CEO/CFO concluded that the Company's disclosure controls were ineffective due to the significant deficiency in the Company's internal control over financial reporting due to small Company staff size.

 

To address the significant deficiency, we performed additional analysis and other post-closing procedures in an effort to ensure our condensed consolidated financial statements included in this review report have been prepared in accordance with generally accepted accounting principles. Accordingly, management believes that the financial statements included in this quarterly report on Form 10-Q fairly present in all material respects our financial condition, results of operations and cash flows for the periods presented.

 

Changes in Internal Control Over Financial Reporting

 

There were no changes in the Company’s internal control over financial reporting (as defined in Rule 13a-15f of the Exchange Act) that occurred during the current period ended June 30, 2018 that has materially affected, or are reasonably likely to materially affect, the Company’s internal control over financial reporting.

 

Limitations on Internal Controls

 

In designing and evaluating the disclosure controls and procedures, management recognizes that any controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving the desired control objectives. In addition, the design of disclosure controls and procedures must reflect the fact that there are resource constraints and that management is required to apply its judgment in evaluating the benefits of possible controls and procedures relative to their costs.

 

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Additional Information

 

Certificate of Amendment

 

On August 13, 2018, the Company filed a Certificate of Amendment to its Articles of Incorporation, as amended, with the Secretary of State of the State of Nevada to effectuate an increase to the number of authorized shares of common stock of the Company to 8,000,000,000 from 2,000,000,000. The number of authorized shares of all series of its preferred stock remains unchanged at 550,000,000. As a result of the increase of authorized shares of its common stock, the aggregate number of the Company’s authorized shares is 8,550,000,000. The Certificate of Amendment became effective upon filing with the State of Nevada on August 13, 2018. The increase in the number of authorized shares does not affect the shares of the Company’s stock issued and outstanding.

 

Restricted Stock Grant Agreements

 

On August 9, 2018, the Company entered into Restricted Stock Grant Agreements (the “Aug Consultants RSGAs”) with four 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 Aug Consultants RSGAs are performance based shares and none have yet vested nor have any been issued. The Aug Consultants RSGAs provide the issuance of up to an aggregate of 8,500,000 shares of the Company’s common stock provided certain milestones are met in certain stages; a) If the Company’s consolidated gross revenue, calculated in accordance with generally accepted accounting principles, consistently applied, equals or exceeds $15,000,000 for the trailing twelve month period, the Company will issue to the consultants up to an aggregate of 4,250,000 shares of its common stock; b) If the Company’s consolidated operating profit (Operating Profit = Operating Revenue - Cost of Goods Sold - Operating Expenses - Depreciation & Amortization), calculated in accordance with generally accepted accounting principles, equals or exceeds $1,500,000 for the trailing twelve month period as reported as reported in the Company’s SEC Reports, the Company will issue to the consultants up to an aggregate of 4,250,000 shares of its common stock. As the performance goals are achieved, the shares shall become eligible for vesting and issuance.

 

Conversion of Notes

 

Between August 6, 2018 and August 13, 2018, holders of convertible promissory notes converted an aggregate principal and interest amount of $62,075 into an aggregate of 22,452,005 shares of the Company’s common stock. 

 

Stock Issuances and Board Approvals 

  

Between July 31, 2018 and August 9, 2018, the Company issued to consultants an aggregate of 4,428,058 shares of the Company’s common stock in lieu of cash considerations. 

 

In connection with certain one-time make good agreements, on July 31, 2018, the Company issued an aggregate of 881,678 shares of its common stock to certain holders of its common stock.

 

On August 9, 2018 the board of directors approved the issuance of an aggregate of 41,830,000 shares of the Company’s Series D-1 preferred stock to certain consultants and service providers of the Company for services rendered to the Company.

 

On August 9, 2018, the board of directors approved the issuance of an aggregate of 1,850,000 shares of Company’s common stock to consultants for services including investor relations services.

 

The securities above were offered and sold pursuant to an exemption from the registration requirements under Section 4(a)(2) of the Securities Act since, among other things, the transactions did not involve a public offering.

 

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PART II

 

Item 1.   Legal Proceedings.

 

None

 

Item 1A. Risk Factors.  

 

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

 

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

 

None

 

Item 3.   Defaults Upon Senior Securities.

 

None

 

Item 4.   Mine Safety Disclosures

 

Not applicable.

 

Item 5.   Other Information.

 

Not applicable.

 

Item 6.   Exhibits.

 

Exhibit
Number
  Description of Exhibit
 
3.1  

Certificate of Amendment to Articles of Incorporation filed with the Secretary of State of Nevada on August 13, 2018

31   Certification by Chief Executive Officer and Chief Financial Officer, required by Rule 13a-14(a) or Rule 15d-14(a) of the Exchange Act.
32   Certification pursuant to 18 U.S.C. §1350 as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
101.INS   XBRL Instance Document.*
101.SCH   XBRL Taxonomy Extension Schema.*
101.CAL   XBRL Taxonomy Extension Calculation Linkbase.*
101.DEF   XBRL Taxonomy Extension Definition Linkbase.*
101.LAB   XBRL Taxonomy Extension Label Linkbase.*
101.PRE   XBRL Extension Presentation Linkbase.*

 

* Attached as Exhibit 101 to this report are the following financial statements from the Company’s Quarterly Report on Form 10-Q for the quarter ended June 30, 2018 formatted in XBRL (eXtensible Business Reporting Language): (i) the Balance Sheets, (ii) the Statement of Operations, (iii) the Statement of Shareholders’ Equity, (iv) the Statement of Cash Flow, and (v) Notes to Financial Statements.

 

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SIGNATURES

 

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

 

  ORIGINCLEAR, INC.
     
  By: /s/ T Riggs Eckelberry
    T Riggs Eckelberry
    Chief Executive Officer
(Principal Executive Officer) and
    Acting Chief Financial Officer
(Principal Accounting and Financial Officer)
    August 14, 2018

 

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