Originclear, Inc 10-Q for FY2020 Q1
Originclear, Inc. (OCLN)
About this 10-Q
Originclear, Inc filed this 10-Q on July 6, 2020, covering the quarter ended March 31, 2020 (FY2020 Q1).
Headline figures
Quarter ended March 31, 2020, as reported in this filing, compared with the same period a year earlier where the filing states it.
- Revenue
- $1.09M
- up 47.2% from $742.04K a year earlier
- Net income
- $21.6M
- compared with a net loss of $331.27K a year earlier
- Diluted EPS
- $0.22
- compared with -$0.38 a year earlier
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: March 31, 2020
☐ TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from __________ to __________
Commission File Number: 333-147980
ORIGINCLEAR, INC.
(Exact name of registrant as specified in its charter)
| Nevada | 26-0287664 | |
| (State or other jurisdiction
of incorporation or organization) |
(I.R.S. Employer Identification No.) |
2535 E. University Drive,
McKinney, TX 75069
(Address of principal executive offices, Zip Code)
(323) 939-6645
(Registrant’s telephone number, including area code)
Securities registered pursuant to Section 12(b) of the Act:
| Title of each class | Ticker symbol(s) | Name
of each exchange on which registered | ||
| N/A | N/A | N/A |
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 every Interactive Data File required to be submitted 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 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 | ☒ | 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 ☒
As of July 2, 2020 there were 11,648,780 shares of common stock, par value $0.0001 per share, issued and outstanding.
TABLE OF CONTENTS
| Page | ||
| PART I | 1 | |
| Item 1. | Financial Statements. | 1 |
| Item 2. | Management’s Discussion and Analysis of Financial Condition and Results of Operations. | 22 |
| Item 3. | Quantitative and Qualitative Disclosures About Market Risk. | 32 |
| Item 4. | Controls and Procedures. | 32 |
| PART II | 33 | |
| Item 1. | Legal Proceedings. | 33 |
| Item 1A. | Risk Factors. | 33 |
| Item 2. | Unregistered Sales of Equity Securities and Use of Proceeds. | 34 |
| Item 3. | Defaults Upon Senior Securities. | 34 |
| Item 4. | Mine Safety Disclosures. | 34 |
| Item 5. | Other Information. | 34 |
| Item 6. | Exhibits. | 34 |
| SIGNATURES | 35 | |
i
EXPLANATORY NOTE
The Company previously filed a Current Report on Form 8-K with the Securities and Exchange Commission on May 15, 2020 (the “Current Report”) to avail itself of the relief provided by the Securities and Exchange Commission’s Order under Section 36 of the Securities Exchange Act of 1934 Granting Exemptions From Specified Provisions of the Exchange Act and Certain Rules Thereunder dated March 25, 2020 (Release No. 34-88465) (the “Order”). By filing the Current Report on Form 8-K, the Company relied on the Order to receive until June 29, 2020 (an additional 45 days from the original filing deadline of May 15, 2020) to delay the filing of its Quarterly Report on Form 10-Q for the quarter ended March 31, 2020 (the “Quarterly Report”) due to the circumstances related to COVID-19. In particular, COVID-19 has caused severe disruptions in transportation and limited access to the Company’s facilities resulting in limited support from its staff and professional advisors. This has, in turn, delayed the Company’s ability to prepare the Report.
ii
PART I - FINANCIAL INFORMATION
ORIGINCLEAR, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
| March 31, 2020 | December 31, 2019 | |||||||
| (Unaudited) | ||||||||
| ASSETS | ||||||||
| CURRENT ASSETS | ||||||||
| Cash | $ | 297,300 | $ | 490,614 | ||||
| Contracts receivable, less allowance for doubtful accounts of $0 | 327,334 | 522,911 | ||||||
| Contract assets | 222,056 | 26,287 | ||||||
| Convertible note receivable | 121,880 | 117,879 | ||||||
| Other receivable | 2,500 | 2,500 | ||||||
| Prepaid expenses | 9,571 | 47,483 | ||||||
| TOTAL CURRENT ASSETS | 980,641 | 1,207,674 | ||||||
| NET PROPERTY AND EQUIPMENT | 105,708 | 117,069 | ||||||
| OTHER ASSETS | ||||||||
| Fair value investment-securities | 4,400 | 9,600 | ||||||
| Trademark | 4,467 | 4,467 | ||||||
| Security deposit | 3,500 | 3,500 | ||||||
| TOTAL OTHER ASSETS | 12,367 | 17,567 | ||||||
| TOTAL ASSETS | $ | 1,098,716 | $ | 1,342,310 | ||||
| LIABILITIES AND SHAREHOLDERS’ DEFICIT | ||||||||
| Current Liabilities | ||||||||
| Accounts payable and other payable | $ | 1,155,668 | $ | 1,144,545 | ||||
| Accrued expenses | 1,269,064 | 1,163,146 | ||||||
| Cumulative preferred stock dividends payable | 109,899 | 92,472 | ||||||
| Contract liabilities | 232,444 | 428,009 | ||||||
| Capital lease, current portion | 9,088 | 9,088 | ||||||
| Customer deposit | 143,503 | 136,765 | ||||||
| Warranty reserve | 20,000 | 20,000 | ||||||
| Loan payable, merchant cash advance, net of finance fees of $0 | 366,577 | 427,214 | ||||||
| Loan payable, related party | 165,172 | 187,054 | ||||||
| Promissory note, related party | 5,000 | - | ||||||
| Derivative liabilities | 9,109,600 | 31,640,470 | ||||||
| Series F 8% Convertible Preferred Stock, 1,678 shares issued and outstanding, redeemable value of $1,678,000 | 1,678,000 | 1,678,000 | ||||||
| Convertible promissory notes, net of discount of $0 | 1,891,613 | 2,879,325 | ||||||
| Total Current Liabilities | 16,155,628 | 39,806,088 | ||||||
| Long Term Liabilities | ||||||||
| Capital lease, long term portion | 14,801 | 17,073 | ||||||
| Series G 8% Convertible Preferred Stock, 430 and 530 shares issued and outstanding notes, respectively, redeemable value of $430,000 and $530,000, respectively | 430,000 | 530,000 | ||||||
| Series I 8% Convertible Preferred Stock, 797 shares issued and outstanding notes, respectively, redeemable value of $797,400 | 797,400 | 797,400 | ||||||
| Series K 8% Convertible Preferred Stock, 2,896 and 2,001 shares issued and outstanding notes, respectively, redeemable value of $2,895,900 and $2,000,650, respectively | 2,895,900 | 2,000,650 | ||||||
| Convertible promissory notes, net of discount of $0 | 1,473,325 | 552,975 | ||||||
| Total Long Term Liabilities | 5,611,426 | 3,898,098 | ||||||
| Total Liabilities | 21,767,054 | 43,704,186 | ||||||
| COMMITMENTS AND CONTINGENCIES (See Note 11) | - | - | ||||||
| SHAREHOLDERS’ DEFICIT | ||||||||
| Preferred stock, $0.0001 par value, 550,000,000 shares authorized | ||||||||
| 1,000 shares of Series C issued and outstanding, respectively | - | - | ||||||
| 38,500,000 shares of Series D-1 issued and outstanding, respectively | 3,850 | 3,850 | ||||||
| 1,537,213 and 2,139,649 shares of Series E issued and outstanding, respectively | 154 | 214 | ||||||
| 349 shares of Series J issued and outstanding, respectively | - | - | ||||||
| 1,405 and 1,000 shares of Series L issued and outstanding, respectively | - | - | ||||||
| 34,200 shares of Series M issued and outstanding, respectively | 3 | 3 | ||||||
| Common stock, $0.0001 par value, 16,000,000,000 shares authorized | ||||||||
| 8,563,384 and 4,854,993 equity shares issued and outstanding, respectively | 857 | 486 | ||||||
| Preferred treasury stock,1,000 and 1,000 shares outstanding, respectively | - | - | ||||||
| Additional paid in capital - Common stock | 65,007,176 | 64,915,364 | ||||||
| Accumulated other comprehensive loss | (133 | ) | (134 | ) | ||||
| Accumulated deficit | (85,680,338 | ) | (107,281,659 | ) | ||||
| TOTAL SHAREHOLDERS’ DEFICIT | (20,668,338 | ) | (42,361,876 | ) | ||||
| TOTAL LIABILITIES AND SHAREHOLDERS’ DEFICIT | $ | 1,098,716 | $ | 1,342,310 | ||||
The accompanying notes are an integral part of these unaudited condensed consolidated financial statements
1
ORIGINCLEAR, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE THREE MONTHS ENDED MARCH 31, 2020 AND 2019
(Unaudited)
| Three Months Ended | ||||||||
| March 31, 2020 | March 31, 2019 | |||||||
| Sales | $ | 1,092,438 | $ | 742,043 | ||||
| Cost of Goods Sold | 879,145 | 723,263 | ||||||
| Gross Profit | 213,293 | 18,780 | ||||||
| Operating Expenses | ||||||||
| Selling and marketing expenses | 374,923 | 482,659 | ||||||
| General and administrative expenses | 549,911 | 587,070 | ||||||
| Research and development | 28,982 | 23,950 | ||||||
| Depreciation and amortization expense | 11,361 | 10,729 | ||||||
| Total Operating Expenses | 965,177 | 1,104,408 | ||||||
| Loss from Operations | (751,884 | ) | (1,085,628 | ) | ||||
| OTHER INCOME (EXPENSE) | ||||||||
| Other income | 4,000 | 19,036 | ||||||
| Gain on conversion of preferred stock | 1,229 | - | ||||||
| Unrealized gain(loss) on investment securities | (5,200 | ) | (7,200 | ) | ||||
| Loss on settlement of convertible notes | - | (314,295 | ) | |||||
| Commitment fee | - | (34,378 | ) | |||||
| Loss on conversion of debt | - | (514,404 | ) | |||||
| Gain on net change in derivative liability and conversion of debt | 22,530,870 | 1,944,589 | ||||||
| Interest expense | (177,601 | ) | (338,992 | ) | ||||
| TOTAL OTHER (EXPENSE) INCOME | 22,353,298 | 754,356 | ||||||
| NET INCOME (LOSS) | $ | 21,601,414 | $ | (331,272 | ) | |||
| PREFERRED STOCK DIVIDENDS | $ | - | $ | (38,156 | ) | |||
| NET AVAILABLE TO SHAREHOLDERS | $ | 21,601,414 | $ | (369,428 | ) | |||
| BASIC EARNINGS (LOSS) PER SHARE ATTRIBUTABLE TO SHAREHOLDERS’ | $ | 3.33 | $ | (0.38 | ) | |||
| DILUTED EARNINGS (LOSS) PER SHARE ATTRIBUTABLE TO SHAREHOLDERS’ | $ | 0.22 | $ | (0.38 | ) | |||
| WEIGHTED-AVERAGE COMMON SHARES OUTSTANDING, | ||||||||
| BASIC | 6,494,377 | 875,828 | ||||||
| DILUTED | 100,433,377 | 875,828 | ||||||
The accompanying notes are an integral part of these unaudited condensed consolidated financial statements
2
ORIGINCLEAR, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF SHAREHOLDERS’ DEFICIT
FOR THE THREE MONTHS ENDED MARCH 31, 2020 AND 2019
| THREE MONTHS ENDED MARCH 31, 2019 | ||||||||||||||||||||||||||||||||
| Additional | ||||||||||||||||||||||||||||||||
| Preferred stock | Common stock | Paid-in Capital Common | Accumulated Other Comprehensive | Accumulated | ||||||||||||||||||||||||||||
| Shares | Amount | Shares | Amount | Stock | loss | Deficit | Total | |||||||||||||||||||||||||
| Balance at December 31, 2018 | 40,640,649 | $ | 4,064 | 875,244 | $ | 88 | $ | 63,179,433 | $ | (134 | ) | $ | (79,807,981 | ) | $ | (16,624,530 | ) | |||||||||||||||
| Common stock issuance for conversion of debt and accrued interest | - | - | 313,014 | 31 | 891,224 | - | - | 891,255 | ||||||||||||||||||||||||
| Common stock issued at fair value for services | - | - | 116,539 | 12 | 279,217 | - | - | 279,229 | ||||||||||||||||||||||||
| Common stock issued through a private placement for purchase of Series G Preferred stock | - | - | 82,799 | 8 | (8 | ) | - | - | - | |||||||||||||||||||||||
| Cumulative preferred stock dividend | - | - | - | - | (38,156 | ) | - | - | (38,156 | ) | ||||||||||||||||||||||
| Other comprehensive gain | - | - | - | - | - | 1 | - | 1 | ||||||||||||||||||||||||
| Net loss | - | - | - | - | - | - | (331,272 | ) | (331,272 | ) | ||||||||||||||||||||||
| Balance at March 31, 2019 (unaudited) | 40,640,649 | $ | 4,064 | 1,387,596 | $ | 139 | $ | 64,311,710 | $ | (133 | ) | $ | (80,139,253 | ) | $ | (15,823,473 | ) | |||||||||||||||
| THREE MONTHS ENDED MARCH 31, 2020 | ||||||||||||||||||||||||||||||||
| Accumulated | ||||||||||||||||||||||||||||||||
| Preferred stock | Common stock | Additional Paid-in | Other Comprehensive | Accumulated | ||||||||||||||||||||||||||||
| Shares | Amount | Shares | Amount | Capital | loss | Deficit | Total | |||||||||||||||||||||||||
| Balance at December 31, 2019 | 40,674,799 | 4,067 | 4,854,993 | 486 | 64,915,364 | (134 | ) | (107,281,659 | ) | (42,361,876 | ) | |||||||||||||||||||||
| Common stock issuance for conversion of debt and accrued interest | - | - | 2,180,848 | 218 | 77,529 | - | - | 77,747 | ||||||||||||||||||||||||
| Common stock issued at fair value for services | - | - | 622,181 | 62 | 61,803 | - | - | 61,865 | ||||||||||||||||||||||||
| Common stock issued for conversion of Series E Preferred stock | (602,436 | ) | (60 | ) | 30,124 | 3 | 57 | - | - | - | ||||||||||||||||||||||
| Common stock issued for conversion of Series L Preferred stock | (43 | ) | - | 875,238 | 88 | (88 | ) | - | - | - | ||||||||||||||||||||||
| Issuance of Series K Preferred stock | 50 | - | - | - | - | - | - | - | ||||||||||||||||||||||||
| Issuance of Series L Preferred stock through a private placement associated with the Series K Preferred note | 448 | - | - | - | - | - | - | - | ||||||||||||||||||||||||
| Reclassification of non-cash adjustment | - | - | - | - | (46,260 | ) | - | - | (46,260 | ) | ||||||||||||||||||||||
| Gain on conversion of Series L Preferred stock | - | - | - | - | (1,229 | ) | - | - | (1,229 | ) | ||||||||||||||||||||||
| Comprehensive gain | - | - | - | - | - | 1 | - | 1 | ||||||||||||||||||||||||
| Net Income | - | - | - | - | - | - | 21,601,414 | 21,601,414 | ||||||||||||||||||||||||
| Balance at March 31, 2020 (unaudited) | 40,072,818 | $ | 4,007 | 8,563,384 | $ | 857 | $ | 65,007,176 | $ | (133 | ) | $ | (85,680,245 | ) | $ | (20,668,338 | ) | |||||||||||||||
The accompany notes are an integral part of these unaudited condensed consolidated financial statements
3
ORIGINCLEAR, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE THREE MONTHS ENDED MARCH 31, 2020 AND 2019
(Unaudited)
| Three Months Ended | ||||||||
| March 31, 2020 | March 31, 2019 | |||||||
| CASH FLOWS FROM OPERATING ACTIVITIES: | ||||||||
| Net Income (loss) | $ | 21,601,414 | $ | (331,272 | ) | |||
| Adjustment to reconcile net loss to net cash used in operating activities | ||||||||
| Depreciation and amortization | 11,361 | 10,729 | ||||||
| Common stock issued for services | 61,865 | 279,229 | ||||||
| Loss on net change in valuation of derivative liability | (22,530,870 | ) | (1,944,589 | ) | ||||
| Loss on conversion of debt | - | 514,404 | ||||||
| Loss on settlement of debt | - | 314,295 | ||||||
| Debt discount recognized as interest expense | - | 132,477 | ||||||
| Net unrealized loss on fair value of security | 5,200 | 7,200 | ||||||
| Gain on conversion of preferred stock | (1,229 | ) | - | |||||
| Convertible note receivable | (4,000 | ) | - | |||||
| Amortization of financing fees and cost | - | 110,891 | ||||||
| Change in Assets (Increase) Decrease in: | ||||||||
| Contracts receivable | 195,577 | 19,534 | ||||||
| Contract asset | (195,769 | ) | 6,618 | |||||
| Prepaid expenses and other assets | 37,912 | (12,736 | ) | |||||
| Change in Liabilities Increase (Decrease) in: | ||||||||
| Accounts payable | 11,123 | 143,784 | ||||||
| Accrued expenses | 70,043 | 2,556 | ||||||
| Contract liabilities | (195,565 | ) | 19,497 | |||||
| Customer deposit | 6,738 | (6,738 | ) | |||||
| Deferred income | - | 28,500 | ||||||
| NET CASH USED IN OPERATING ACTIVITIES | (926,200 | ) | (705,621 | ) | ||||
| CASH FLOWS USED FROM INVESTING ACTIVITIES: | ||||||||
| Net change in fair value investment security | - | (19,035 | ) | |||||
| CASH USED IN INVESTING ACTIVITIES | - | (19,035 | ) | |||||
| CASH FLOWS FROM FINANCING ACTIVITIES: | ||||||||
| Payments on capital lease | (2,272 | ) | (2,272 | ) | ||||
| Loan payable financing, net | (60,637 | ) | (41,749 | ) | ||||
| Loan payable, related party, net | (21,882 | ) | (15,674 | ) | ||||
| Promissory note payable, related party | 5,000 | (21 | ) | |||||
| Net cumulative preferred stock dividends payable | 17,427 | 13,358 | ||||||
| Payment on redemption of preferred stock | - | (65,000 | ) | |||||
| Net proceeds for issuance of preferred stock for cash | 795,250 | 530,000 | ||||||
| NET CASH PROVIDED BY FINANCING ACTIVITIES | 732,886 | 418,642 | ||||||
| NET (DECREASE) INCREASE IN CASH | (193,314 | ) | (306,014 | ) | ||||
| CASH BEGINNING OF YEAR | 490,614 | 609,144 | ||||||
| CASH END OF YEAR | $ | 297,300 | $ | 303,130 | ||||
| SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION | ||||||||
| Interest paid | $ | 7,086 | $ | 16,926 | ||||
| Taxes paid | $ | - | $ | - | ||||
| SUPPLEMENTAL DISCLOSURES OF NON CASH TRANSACTIONS | ||||||||
| Common stock issued at fair value for conversion of debt, plus accrued interest, and other fees | $ | 77,747 | $ | 891,255 | ||||
The accompanying notes are an integral part of these unaudited condensed consolidated financial statements
4
ORIGINCLEAR, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS-UNAUDITED
MARCH 31, 2020
| 1. | The accompanying unaudited condensed consolidated financial statements of OriginClear, Inc. (the “Company”) have been prepared in accordance with accounting principles generally accepted in the United States of America for interim financial information and with the instructions to Form 10-Q and Rule 10-01 of Regulation S-X. Accordingly, they do not include all of the information and footnotes required by generally accepted accounting principles for complete financial statements. In the opinion of management, all normal recurring adjustments considered necessary for a fair presentation have been included. Operating results for the three months ended March 31, 2020 are not necessarily indicative of the results that may be expected for the year ending December 31, 2020. 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, 2019. |
Going Concern
The accompanying financial statements have been prepared on a going concern basis of accounting, which contemplates continuity of operations, realization of assets and liabilities and commitments in the normal course of business. The accompanying financial statements do not reflect any adjustments that might result if the Company is unable to continue as a going concern. These factors, among others raise substantial doubt about the Company’s ability to continue as a going concern. Our independent auditors, in their report on our audited financial statements for the year ended December 31, 2019 expressed substantial doubt about our 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, achieving a level of profitable operations and receiving additional cash. During the three months ended March 31, 2020, the Company obtained funds from sales of its preferred stock. Management believes this funding will continue from its current investors and from new investors. The Company also generated revenue of $1,092,438 and has standing purchase orders and open invoices with customers which will provide funds for operations. Management believes the existing shareholders, and 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 restrictions on our operations, in the case of debt financing or cause substantial dilution for our stockholders, in case of equity financing.
| 2. | SUMMARY OF SIGNIFICANT ACCOUNTING POLICES |
This summary of significant accounting policies of the Company is presented to assist in understanding the Company’s financial statements. The financial statements and notes are representations of the Company’s management, which is responsible for their integrity and objectivity. These accounting policies conform to accounting principles generally accepted in the United States of America and have been consistently applied in the preparation of the financial statements.
Principles of Consolidation
The accompanying consolidated financial statements include the accounts of OriginClear, Inc. and its wholly owned operating subsidiaries, Progressive Water Treatment, Inc., and OriginClear Technologies, Ltd. All material intercompany transactions have been eliminated upon consolidation of these entities.
Cash and Cash Equivalent
The Company considers all highly liquid investments with an original maturity of three months or less to be cash equivalents.
5
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, derivative liabilities and other 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.
Net Earnings (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.
| For the Three Months Ended March 31, | ||||||||
| 2020 | 2019 | |||||||
| Income (Loss) to common shareholders (Numerator) | $ | 21,601,414 | $ | (331,272 | ) | |||
| Basic weighted average number of common shares outstanding (Denominator) | 6,494,377 | 875,828 | ||||||
| Diluted weighted average number of common shares outstanding (Denominator) | 100,433,377 | 875,828 | ||||||
The Company excludes issuable shares from warrants, convertible notes and preferred stock, if their impact on the loss per share is anti-dilutive, and includes the issuable shares if their impact is dilutive.
| Anti-dilutive shares | Dilutive shares | |||||||
| March 31, 2020 | ||||||||
| Warrants shares | 122,044 | - | ||||||
| Convertible debt shares | 97,207,689 | 93,939,000 | ||||||
| Preferred shares | 40,073,167 | - | ||||||
| March 31, 2019 | ||||||||
| Warrants shares | 125,456 | - | ||||||
| Convertible debt shares | 4,051,573 | - | ||||||
| Preferred shares | 40,639,649 | - | ||||||
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.
6
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 were $0 as of March 31, 2020 and December 31, 2019, respectively. The net contract receivable balance was $327,334 and $522,911 at March 31, 2020 and December 31, 2019, respectively.
Indefinite Lived Intangibles and Goodwill Assets
The Company accounts for business combinations under the acquisition method of accounting in accordance with ASC 805, “Business Combinations,” where the total purchase price is allocated to the tangible and identified intangible assets acquired and liabilities assumed based on their estimated fair values. The purchase price is allocated using the information currently available, and may be adjusted, up to one year from acquisition date, after obtaining more information regarding, among other things, asset valuations, liabilities assumed and revisions to preliminary estimates. The purchase price in excess of the fair value of the tangible and identified intangible assets acquired less liabilities assumed is recognized as goodwill.
The Company tests for indefinite lived intangibles and goodwill impairment in the fourth quarter of each year and whenever events or circumstances indicate that the carrying amount of the asset exceeds its fair value and may not be recoverable. In accordance with its policies, the Company performed a qualitative assessment of indefinite lived intangibles and goodwill at March 31, 2020, and determined there was no impairment of indefinite lived intangibles and goodwill.
Research and Development
Research and development costs are expensed as incurred. Total research and development costs were $28,982 and $23,950 for the three months ended March 31, 2020 and March 31, 2019, respectively.
Property and Equipment
Property and equipment are stated at cost. Gain or loss is recognized upon disposal of property and equipment, and the asset and related accumulated depreciation are removed from the accounts. Expenditures for maintenance and repairs are charged to expense as incurred, while expenditures for addition and betterment are capitalized. Furniture and equipment are depreciated on the straight-line method and include the following categories:
| Estimated Life | ||||
| Machinery and equipment | 5-10 years | |||
| Furniture, fixtures and computer equipment | 5-7 years | |||
| Vehicles | 3-5 years | |||
| Leasehold improvements | 2-5 years |
7
Long-lived assets held and used by the Company are reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. In the event that facts and circumstances indicate that the cost of any long-lived assets may be impaired, an evaluation of recoverability would be performed following generally accepted accounting principles.
Depreciation expense during the three months ended March 31, 2020 and 2019, respectively was $11,361 and $10,729.
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.
Accounting for Derivatives
The Company evaluates all of its financial instruments to determine if such instruments are derivatives or contain features that qualify as embedded derivatives. For derivative financial instruments that are accounted for as liabilities, the derivative instrument is initially recorded at its fair value and is then re-valued at each reporting date, with changes in the fair value reported in the statements of operations. For stock-based derivative financial instruments, the Company uses a probability weighted average series Binomial lattice option pricing models to value the derivative instruments at inception and on subsequent valuation dates.
The classification of derivative instruments, including whether such instruments should be recorded as liabilities or as equity, is evaluated at the end of each reporting period. Derivative instrument liabilities are classified in the balance sheet as current or non-current based on whether or not net-cash settlement of the derivative instrument could be required within 12 months of the balance sheet date.
Fair Value of Financial Instruments
Fair Value of Financial Instruments, requires disclosure of the fair value information, whether or not recognized in the balance sheet, where it is practicable to estimate that value. As of March 31, 2020, the balances reported for cash, contract receivables, cost in excess of billing, prepaid expenses, accounts payable, billing in excess of cost, and accrued expenses approximate the fair value because of their short maturities.
We adopted ASC Topic 820 for financial instruments measured as fair value on a recurring basis. ASC Topic 820 defines fair value, established a framework for measuring fair value in accordance with accounting principles generally accepted in the United States and expands disclosures about fair value measurements.
Fair value is defined as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. ASC Topic 820 established a three-tier fair value hierarchy which prioritizes the inputs used in measuring fair value. The hierarchy gives the highest priority to unadjusted quoted prices in active markets for identical assets or liabilities (level 1 measurements) and the lowest priority to unobservable inputs (level 3 measurements). These tiers include:
| ● | Level 1, defined as observable inputs such as quoted prices for identical instruments in active markets; | |
| ● | Level 2, defined as inputs other than quoted prices in active markets that are either directly or indirectly observable such as quoted prices for similar instruments in active markets or quoted prices for identical or similar instruments in markets that are not active; and | |
| ● | Level 3, defined as unobservable inputs in which little or no market data exists, therefore requiring an entity to develop its own assumptions, such as valuations derived from valuation techniques in which one or more significant inputs or significant value drivers are unobservable. |
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The following table presents certain investments and liabilities of the Company’s financial assets measured and recorded at fair value on the Company’s balance sheets on a recurring basis and their level within the fair value hierarchy as of March 31, 2020.
| Total | (Level 1) | (Level 2) | (Level 3) | |||||||||||||
| Investment at fair value-securities | $ | 4,400 | $ | 4,400 | $ | - | $ | - | ||||||||
| Total Assets measured at fair value | $ | 4,400 | $ | 4,400 | $ | - | $ | - | ||||||||
| Total | (Level 1) | (Level 2) | (Level 3) | |||||||||||||
| Derivative Liability | $ | 9,109,600 | $ | - | $ | - | $ | 9,109,600 | ||||||||
| Total liabilities measured at fair value | $ | 9,109,600 | $ | - | $ | - | $ | 9,109,600 | ||||||||
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, 2020 | $ | 31,640,470 | ||
| Gain on conversion of debt and change in derivative liability | (22,530,870 | ) | ||
| Balance as of March 31, 2020 | $ | 9,109,600 |
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:
| 3/31/2020 | ||
| Risk free interest rate | 0.05% - 2.43% | |
| Stock volatility factor | 0.54% - 207.0% | |
| 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.
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Licensing agreement
The Company analysed the licensing agreement using ASU 606 to determine the timing of revenue recognition. The licensing of the intellectual property (IP) 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.
Reclassification of Certain Expenses
Certain prior year amounts have been reclassified for consistency with the current year presentation. These reclassifications had no effect on the reported results of operation.
Recently Issued Accounting Pronouncements
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
Series C
The Company has designated 1,000 shares of its preferred stock as Series C Preferred Stock. Such 1,000 shares are outstanding and are held by T. Riggs Eckelberry, our chief executive officer. Shares of Series C Preferred Stock are not convertible to common stock, are not entitled to receive dividends, and do not have a liquidation preference. The Series C Preferred Stock have no pre-emptive or subscription rights, and there is no sinking fund provision applicable to the Series C Preferred Stock. The Series C Preferred Stock entitles the holder to 51% of the total voting power of our stockholders. Share of Series C Preferred Stock will automatically be redeemed by the Company at par value on the first to occur of the following events: (i) the date that Mr. Eckelberry ceases to serve as officer, director or consultant of the Company, or (ii) on the date that the Company’s shares of common stock first trade on any national securities exchange provided that (a) the listing rules of any such exchange prohibit preferential voting rights of a class of securities of the Company, or (b) listing on any such national securities exchange is conditioned upon the elimination of the preferential voting rights of the Series C Preferred Stock. As of March 31, 2020, there are 1,000 shares of Series C Preferred Stock issued and outstanding.
Series D-1
The Company has designated 50,000,000 shares of its preferred stock as Series D-1 Preferred Stock. Each share of Series D-1 Preferred Stock is convertible into 0.0005 shares of common stock. The Series D-1 Preferred Stock may not be converted to common stock to the extent such conversion would result in the holder beneficially owning more than 4.99% of our outstanding common stock. The holders of outstanding shares of Series D-1 Preferred Stock are not entitled to receive dividends, and do not have a liquidation preference. The Series D-1 Preferred Stock have no preemptive or subscription rights, and there is no redemption or sinking fund provisions applicable to the Series D-1 Preferred Stock. As of March 31, 2020, there were 38,500,000 shares of Series D-1 Preferred Stock issued and outstanding.
Series E
The Company has designated 4,000,000 shares of its preferred stock as Series E Preferred Stock. Each share of Series E Preferred Stock is convertible into the greater of (A) 0.05 shares of common stock and (B) the number of shares the holder would have received pursuant to the holder’s subscription agreement if the preferred shares were priced based on the average closing sale price of three trading days prior to the date the holder requests a conversion, provided the lowest price for which an adjustment will be made is 50% of the purchase price paid by any purchaser of the Series E Preferred Stock. The Series E Preferred Stock may not be converted to common stock to the extent such conversion would result in the holder beneficially owning more than 4.99% of our outstanding common stock. The holders of outstanding shares of Series E Preferred Stock are not entitled to receive dividends, and do not have a liquidation preference. The Series E Preferred Stock have no pre-emptive or subscription rights, and there is no redemption or sinking fund provisions applicable to the Series E Preferred Stock. The Series E Preferred Stock does not have voting rights, except as required by law and with respect to certain protective provisions set forth in the Certificate of Designation of Series E Preferred Stock. As of December 31, 2019, there were 2,139,649 shares of Series E Preferred Stock issued and outstanding. During the period ended March 31, 2020, the Company issued 30,124 shares of common stock upon conversion of 602,436 Series E Preferred Stock. As of March 31, 2020, there were 1,537,213 shares of Series E Preferred Stock issued and outstanding. The Company did not recognize any gain or loss on conversion.
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Series F
The Company has designated 6,000 shares of its preferred stock as Series F Preferred Stock. The Series F Preferred Stock has a stated value of $1,000 per share. The Series F Preferred Stock is not convertible into common stock. The holders of outstanding shares of Series F Preferred Stock are entitled to quarterly dividends at the annual rate of 8% of the stated value, in preference to any dividends on the common stock. The Series F Preferred Stock has a liquidation preference equal to the stated value plus any accrued but unpaid dividends, in preference to any other series of capital stock of the Company. The Series F Preferred Stock has no pre-emptive or subscription rights, and there is no sinking fund provision applicable to the Series F Preferred Stock. The Series F Preferred Stock does not have voting rights, except as required by law. The Company will be required to redeem all outstanding shares of Series F Preferred Stock on September 1, 2020, at a price equal to the stated value plus any accrued but unpaid dividends. The Company may, in its sole discretion, at any time while the Series F Preferred Stock is outstanding, redeem all or any portion of the outstanding Series F Preferred Stock at a price equal to the stated value plus any accrued but unpaid dividends. There are thus no restrictions on the Company redeeming shares of Series F Preferred Stock, subject to the Company’s payment of any accrued but unpaid dividends upon such redemption. As of March 31, 2020, there were 1,678 shares of Series F Preferred Stock issued and outstanding and the Company accrued dividends in the amount of $33,560.
Series G
The Company has designated 6,000 shares of its preferred stock as Series G Preferred Stock. The Series G Preferred Stock has a stated value of $1,000 per share. The Series G Preferred Stock is not convertible into common stock. The holders of outstanding shares of Series G Preferred Stock are entitled to quarterly dividends at the annual rate of 8% of the stated value, in preference to any dividends on the common stock. The Series G Preferred Stock has a liquidation preference equal to the stated value plus any accrued but unpaid dividends, in preference to any other series of capital stock of the Company (other than the Series F Preferred Stock). The Series G Preferred Stock has no pre-emptive or subscription rights, and there is no sinking fund provision applicable to the Series G Preferred Stock. The Series G Preferred Stock does not have voting rights, except as required by law. The Company will be required to redeem all outstanding shares of Series G Preferred Stock on April 30, 2021, at a price equal to the stated value plus any accrued but unpaid dividends. The Company may, in its sole discretion, at any time while the Series G Preferred Stock is outstanding, redeem all or any portion of the outstanding Series G Preferred Stock at a price equal to the stated value plus any accrued but unpaid dividends. There are thus no restrictions on the Company redeeming shares of Series G Preferred Stock, subject to the Company’s payment of any accrued but unpaid dividends upon such redemption. On February 21, 2020, 100 shares of Series G Preferred Stock were exchanged for Series K Preferred Stock. As of March 31, 2020, there were 430 shares of Series G Preferred Stock issued and outstanding and the Company accrued dividends in the amount of $9,740.
Series I
The Company has designated 4,000 shares of its preferred stock as Series I Preferred Stock. The Series I Preferred Stock has a stated value of $1,000 per share. The Series I Preferred Stock is not convertible into common stock. The holders of outstanding shares of Series I Preferred Stock are entitled to quarterly dividends at the annual rate of 8% of the stated value, in preference to any dividends on the common stock. The Series I Preferred Stock has a liquidation preference equal to the stated value plus any accrued but unpaid dividends, in preference to the common stock. The Series I Preferred Stock has no preemptive or subscription rights, and there is no sinking fund provision applicable to the Series I Preferred Stock. The Series I Preferred Stock does not have voting rights, except as required by law. The Company will be required to redeem all outstanding shares of Series I Preferred Stock two years following the date that is the later of the (i) final closing of the tranche (as designated in the subscription agreement under which such shares were sold) that such shares to be redeemed were part of (a “Series I Tranche”), or (ii) the expiration date of the Series I Tranche that such shares to be redeemed were part of, at a price equal to the stated value plus any accrued but unpaid dividends. The Company may, in its sole discretion, at any time while the Series I Preferred Stock is outstanding, redeem all or any portion of the outstanding Series I Preferred Stock at a price equal to the stated value plus any accrued but unpaid dividends. There are thus no restrictions on the Company redeeming shares of Series I Preferred Stock, subject to the Company’s payment of any accrued but unpaid dividends upon such redemption. The issuance of the shares were accounted for under ASC 480-10-25-4, which requires liability treatment for certain mandatorily redeemable financial instruments, and the cumulative dividends are recorded as interest expense. As of March 31, 2020, there were 797 shares of Series I Preferred Stock issued and outstanding and the Company accrued dividends in the amount of $15,948.
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Series J
The Company has designated 100,000 shares of its preferred stock as Series J Preferred Stock. The Series J Preferred Stock has a stated value of $1,000 per share. The Series J Preferred Stock is convertible into common stock in an amount determined by dividing the stated value by the conversion price, which is equal to lower of (a) the closing price of the common stock on the date the Company has banked funds and received and accepted executed subscription documents and the purchase price or (b) the average closing sale price of the common stock for the five trading days prior to the conversion date; certain prior investors are also entitled to certain make-good shares. The Series J Preferred Stock may not be converted to common stock to the extent such conversion would cause the holder to beneficially own more than 4.99% of the Company’s outstanding common stock. The Series J Preferred Stock are entitled to dividends on an as-converted basis with the common stock. The Series J Preferred Stock will entitle the holders to a payment on an as-converted and pari passu basis with the common stock upon any liquidation. The Series J Preferred Stock has no pre-emptive or subscription rights, and there are no sinking fund or redemption provisions applicable to the Series J Preferred Stock. The Series J Preferred Stock votes on an as-converted basis with the common stock, subject to the beneficial ownership limitation. As of March 31, 2020, there were 349 shares of Series J Preferred Stock issued and outstanding.
Series K
The Company has designated 4,000 shares of its preferred stock as Series K Preferred Stock. The Series K Preferred Stock has a stated value of $1,000 per share. The Series K Preferred Stock is not convertible into common stock. The holders of outstanding shares of Series K Preferred Stock are entitled to quarterly dividends at the annual rate of 8% of the stated value, in preference to any dividends on the common stock. The Series K Preferred Stock has a liquidation preference equal to the stated value plus any accrued but unpaid dividends, in preference to the common stock. The Series K Preferred Stock has no preemptive or subscription rights, and there is no sinking fund provision applicable to the Series K Preferred Stock. The Series K Preferred Stock does not have voting rights, except as required by law. The Company will be required to redeem all outstanding shares of Series K Preferred Stock two years following the date that is the later of the (i) final closing of the tranche (as designated in the subscription agreement under which such shares were sold) that such shares to be redeemed were part of (a “Series K Tranche”), or (ii) the expiration date of the Series K Tranche that such shares to be redeemed were part of, at a price equal to the stated value plus any accrued but unpaid dividends. The Company may, in its sole discretion, at any time while the Series K Preferred Stock is outstanding, redeem all or any portion of the outstanding Series K Preferred Stock at a price equal to the stated value plus any accrued but unpaid dividends. There are thus no restrictions on the Company redeeming shares of Series K Preferred Stock, subject to the Company’s payment of any accrued but unpaid dividends upon such redemption. The issuance of the shares were accounted for under ASC 480-10-25-4, which requires liability treatment for certain mandatorily redeemable financial instruments, and the cumulative dividends are recorded as interest expense. During the period ended March 31, 2020, the Company issued an aggregate of 895 shares of Series K Preferred Stock for an aggregate purchase price of $795,250. On February 21, 2020, an investor was issued 100 shares of Series K Preferred Stock in exchange for 100 shares of Series G Preferred Stock. As of March 31, 2020, there were 2,896 shares of Series K Preferred Stock issued and outstanding and the Company accrued dividends in the amount of $50,620.
Series L
The Company has designated 100,000 shares of its preferred stock as Series L Preferred Stock. The Series L Preferred Stock has a stated value of $1,000 per share. The Series L Preferred Stock is convertible into common stock in an amount determined by dividing the stated value by the conversion price, which is equal to lower of(a) the closing price of the common stock on the date the Company has banked funds and received and accepted executed subscription documents and the purchase price or (b) the average closing sale price of the common stock for the five trading days prior to the conversion date; certain prior investors are also entitled to certain make-good shares. The Series L Preferred Stock may not be converted to common stock to the extent such conversion would cause the holder to beneficially own more than 4.99% of the Company’s outstanding common stock. The Series L Preferred Stock are entitled to dividends on an as-converted basis with the common stock. The Series L Preferred Stock will entitle the holders to a payment on an as-converted and pari passu basis with the common stock upon any liquidation. The Series L Preferred Stock has no pre-emptive or subscription rights, and there is no sinking fund or redemption provisions applicable to the Series L Preferred Stock. The Series L Preferred Stock votes on an as-converted basis with the common stock, subject to the beneficial ownership limitation. During the period ended March 31, 2020, the Company issued an aggregate of 875,238 shares of common stock upon conversion of 43 shares of Series L Preferred Stock. The Company also issued 448 shares of Series L Preferred Stock with the Series K Preferred Stock. As of March 31, 2020, there were an aggregate of 1,405 shares of Series L Preferred Stock issued and outstanding. The Company recognized a loss on the conversions of $1,229.
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Series M
Pursuant to the Amended and Restated Certificate of Designation of Series M Preferred Stock filed with the Secretary of State of Nevada on July 1, 2020, the Company has designated 800,000 shares of its preferred stock as Series M Preferred Stock. Each share of Series M Preferred Stock has a stated value of $25. The Series M Preferred Stock is not convertible into common stock. The holders of outstanding shares of Series M Preferred Stock are entitled to receive dividends, at the annual rate of 10%, payable monthly, payable in preference and priority to any payment of any dividend on the common stock. The Series M Preferred Stock will be entitled to a liquidation preference in an amount equal to $25 per share plus any declared but unpaid dividends, before any payments to holders of common stock. The Series M Preferred Stock have no pre-emptive or subscription rights, and there are no sinking fund provisions applicable to the Series M Preferred Stock. The Series M Preferred Stock does not have voting rights, except as required by law and with respect to certain protective provisions set forth in the Certificate of Designation of Series M Preferred Stock. To the extent it may lawfully do so, the Company may, in its sole discretion, at any time when there are outstanding shares of Series M Preferred Stock, redeem any or all of the then outstanding shares of Series M Preferred Stock at a redemption price of $37.50 per share (150% of the stated value) plus any accrued but unpaid dividends. During the period ended March 31, 2020, the Company reclassified noncash accrued interest of $46,260 associated with the exchange of a note, from preferred additional paid in capital, which affected the balance sheet only. As of March 31, 2020, there were 34,200 shares of Series M Preferred Stock issued and outstanding that do not qualify to receive dividends.
Common Stock
On April 23, 2019, the Company filed a certificate of amendment to its articles of incorporation, with the Secretary of the State of Nevada effectuate an increase to the number of authorized shares of common stock of the Company from 8,000,000,000 shares from 16,000,000,000.
Reverse Stock Split
On October 25, 2019, the Company effected a one-for-two thousand (1 for 2,000) reverse stock split of its common stock (the “Reverse Split”). All shares, options, warrants and per share information throughout these consolidated financial statements have been retroactively restated to reflect the Reverse Split.
March 31, 2020
The Company issued 2,180,848 shares of common stock for the settlement of convertible promissory notes in an aggregate principal in the amount of $67,362, plus interest in the amount of $10,385, at conversion prices of $0.025 to $0.045.
The Company issued 622,181 shares of common stock for services at fair value of $61,865.
The Company issued 30,124 shares of common stock upon conversion of 602,436 shares of Series E preferred stock.
The Company issued 875,238 shares of common stock upon conversion of 43 shares of Series L preferred stock.
March 31, 2019
The Company issued 313,014 shares of common stock for the settlement of convertible promissory notes in an aggregate principal in the amount of $284,973, plus interest in the amount of $51,578, plus a default settlement of $40,500, with an aggregate fair value loss on conversion of debt in the amount of $514,404, based upon conversion prices of $1.8 to $3.60.
The Company issued 116,539 shares of common stock for services at fair value of $279,229.
The Company issued 82,799 shares of common stock through a private placement as additional consideration for purchase of Series G preferred stock.
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| 4. | RESTRICTED STOCKS AND WARRANTS |
Restricted Stock to CEO
Between May 12, 2016, and August 14, 2019, the Company entered into Restricted Stock Grant Agreements (“the RSGAs”) 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 RSGAs are performance based shares and none have yet vested nor have any been issued. The RSGAs provides for the issuance of up to an aggregate of 109,214 shares of the Company’s common stock to Mr. Eckelberry provided certain milestones are met in certain stages; a) If the Company’s consolidated gross revenue, calculated in accordance with generally accepted accounting principles, consistently applied, equals or exceeds $15,000,000 for the trailing twelve month period as reported in the Company’s quarterly or annual financial statements, the Company will issue up to an aggregate of 54,607 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 an aggregate of 54,607 shares of its common stock. The Company has not recognized any costs associated with the milestones, because achievement is not probable. As the performance goals are achieved, the shares shall become eligible for vesting and issuance.
Restricted Stock to Employees and Consultants
Between May 12, 2016, and August 14, 2019, the Company entered into Restricted Stock Grant Agreements (“the E&C RSGAs”) with its employees and 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 E&C RSGAs are performance based shares and none have yet vested nor have any been issued. The E&C RSGAs provide for the issuance of up to 378,750 shares of the Company’s common stock to employees and consultants 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 an aggregate of 189,375 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 an aggregate of 189,375 shares of its common stock. As of December 31, 2019, an aggregate of 30,250 shares issuable under the E&C RSGAs have been cancelled. The Company has not recognized any costs associated with the milestones, because achievement is not probable. As the performance goals are achieved, the shares shall become eligible for vesting and issuance.
On August 14, 2019, the Board of Directors approved an amendment to the RSGAs and E&C RSGAs to include an alternative vesting schedule for the Grantees. The Grantees can elect to participate in the alternate vesting schedule for grants received at least two years prior to the date requested. On the first day of each calendar month, an aggregate dollar amount of restricted stock equal to an aggregate of 5% of the total dollar amount of the Company’s common stock that traded during the prior calendar month, will vest, divided equally among all RSGAs and E&C RSGAs that have duly elected to participate in the alternate vesting schedule, with value based on the fair market value under the respective RSGAs and E&C RSGAs. The fair market value shall equal the average of the trailing ten (10) closing trade prices of the Company’s common stock on the last ten (10) trading days of the month immediately prior to the date of determination as quoted on the public securities trading market on which the Company’s common stock is then traded. If the fair market value of the Company’s common stock on the date the shares are vested is less than the fair market value of the Company’s common stock on the effective date of the RSGA or E&C RSGA, then the number of vested shares issuable (assuming all conditions are satisfied) shall be increased so that the aggregate fair market value of vested shares issuable on the vesting date equals the aggregate fair market value that such number of shares would have had on the effective date. Upon the occurrence of a Company performance goal, the right to participate in the alternate vesting schedule will terminate, and the vesting of the remaining unvested shares will be as set forth under the restricted stock award agreement. As of March 31 2020, there was no alternative vesting selected and no shares were issued.
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Warrants
During the period ended March 31, 2020, no warrants were issued by the Company. A summary of the Company’s warrant activity and related information follows for the three months ended March 31, 2020:
| March 31, 2020 | ||||||||
| Weighted | ||||||||
| Number | average | |||||||
| of | exercise | |||||||
| Warrants | price | |||||||
| Outstanding - beginning of period | 122,044 | $ | 500 | |||||
| Granted | - | $ | - | |||||
| Exercised | - | $ | - | |||||
| Forfeited | - | $ | - | |||||
| Outstanding - end of period | 122,044 | $ | 500 | |||||
At March 31, 2020, the weighted average remaining contractual life of warrants outstanding:
| March 31, 2020 | ||||||||||||||
| Weighted | ||||||||||||||
| Average | ||||||||||||||
| Remaining | ||||||||||||||
| Exercisable | Warrants | Warrants | Contractual | |||||||||||
| Prices | Outstanding | Exercisable | Life (years) | |||||||||||
| $ | 500.00 | 122,044 | 122,044 | 1.37 | ||||||||||
| 122,044 | 122,044 | |||||||||||||
At March 31, 2020, the aggregate intrinsic value of the warrants outstanding was $0.
| 5. | CONVERTIBLE PROMISSORY NOTES |
As of March 31, 2020, the outstanding convertible promissory notes are summarized as follows:
| Convertible Promissory Notes | $ | 3,364,938 | ||
| Less current portion | 1,891,613 | |||
| Total long-term liabilities | $ | 1,473,325 |
Maturities of long-term debt for the next five years are as follows:
| Period Ending March 31, | Amount | |||
| 2021 | 1,891,613 | |||
| 2022 | 1,411,050 | |||
| 2023 | - | |||
| 2024 | 62,275 | |||
| $ | 3,364,938 | |||
At March 31, 2020, the Company had $3,364,938 in convertible promissory notes.
On various dates from 2014 through May 2015, the Company issued unsecured convertible promissory notes (the “2014-2015 Notes”), that matured on various dates and were extended sixty (60) months from the effective date of each Note. The 2014-2015 Notes bear interest at 10% per annum. The 2014-2015 Notes may be converted into shares of the Company’s common stock at conversion prices ranging from the lesser of $4,200 to $9,800 (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 2014-2015 Notes. In addition, for as long as the 2014-2015 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 2014-2015 Notes or such other convertible notes or a term was not similarly provided to the purchaser of the 2014-2015 Notes or such other convertible notes, then such more favorable or additional term shall, at the purchaser’s option, become part of the 2014-2015 Notes and such other convertible notes. The conversion feature of the 2014-2015 Notes was considered a derivative in accordance with current accounting guidelines because of the reset conversion features of the 2014-2015 Notes. During the period ended March 31, 2020, the Company issued 820,937 shares of common stock, upon conversion of $19,500 in principal, plus accrued interest of $10,385. As of March 31, 2020, the 2014-2015 Notes had an aggregate remaining balance of $1,081,050.
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The unsecured convertible promissory notes (the “OID Notes”) had an aggregate remaining 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, which were extended to June 30, 2018. The OID Notes were convertible into shares of the Company’s common stock at a conversion price initially of $30,620. After the amendment, the conversion price changed to the lesser of $5,600 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. During the period ended March 31, 2020, the Company issued 130,711 shares of common stock upon conversion of principal in the amount of $5,150. The remaining balance of the OID Notes as of March 31, 2020 was $62,275.
The Company issued various, unsecured convertible promissory notes (the “2015-2016 Notes”), on various dates ending on May 19, 2016. The 2015-2016 Notes matured and were extended from the date of each tranche through maturity dates ending on May 19, 2020. The 2015-2016 Notes bear interest at 10% per annum. The 2015-2016 Notes may be converted into shares of the Company’s common stock at conversion prices ranging from the lesser of $1,400 to $5,600 (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 2015-2016 Notes. The conversion feature of the 2015-2016 Notes was considered a derivative in accordance with current accounting guidelines because of the reset conversion features of the 2015-2016 Notes. The remaining balance of the 2015-2016 Notes as of March 31, 2020 was $1,200,000.
The Company issued a convertible note (the “Dec 2015 Note”) in exchange for 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 March 31, 2020, the remaining balance of the Dec 2015 Note was $167,048.
The Company issued a convertible note (the “Sep 2016 Note”) in exchange for 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. 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 date of the issuance, 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. As of March 31, 2020, the remaining balance of the Sep 2016 Note was $430,896.
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The Company issued two (2) 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 matured 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 Notes. During the nine months ended September 30, 2019, the Company issued 12,500 shares of common stock upon conversion of principal in the amount of $6,523, plus accrued interest of $4,727, with a fair value loss on conversion of $16,250. On March 13, 2019, the Company entered into a settlement agreement with the investor in the amount of $570,000, based on the outstanding balance due and payable under the Apr & May 2018 Notes. The Company set up a reserve of 2,630,769 shares of common stock of the Company for issuance upon conversion by the investor of the amounts owed under the Notes, in accordance with the terms of the Notes, including, but no limited to the beneficial ownership limitations contained in the Notes. In addition to the foregoing, upon the sale by the investor of the settlement shares as delivered to the investor by the Company, resulting in total net proceeds less than the settlement value, the investor is entitled to additional settlement shares of the Company’s common stock. If after the investor has sold all settlement shares, the investor delivers a written notice to the Company certifying that the investor is entitled to additional settlement shares of the Company’s common stock (the “Make-Whole Shares”). The number of make-whole shares being equal to the greater of ((i) zero and (ii) the quotient of (1) the difference of (x) the settlement value with respect to each sale of shares by the Investor after the delivery of the Settlement Shares, minus (y) the aggregate net consideration received by the Investor from the resale of all shares of common stock issued by the Company, divided by (2) the average trailing closing price for ten (10) trading days for the shares immediately preceding the date of delivery of the make-whole shares. During the period ended March 31, 2020, the Company issued 1,229,200 shares of common stock upon conversion of principal in the amount of $42,712. As of March 31, 2020, the remaining balance of the Apr & May 2018 Notes was $423,669.
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 March 31, 2020 was $9,109,600.
| 6. | 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.
The following table represents a disaggregation of revenue by type of good or service from contracts with customers for the period ended March 31, 2020.
| Three Months Ended | ||||||||
| March 31, | ||||||||
| 2020 | 2019 | |||||||
| Equipment Contracts | $ | 763,157 | $ | 446,233 | ||||
| Component Sales | 318,074 | 263,259 | ||||||
| Services Sales | 11,207 | 32,551 | ||||||
| $ | 1,092,438 | $ | 742,043 | |||||
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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 three months ended March 31, 2020 was $222,056 and for the year ending December 31, 2019 was $26,287. The contract liability for the three months ended March 31, 2020 was $232,444 and for the year ending December 31, 2019 $428,009.
| 7. | 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 March 31, 2020, the note included principal of $80,000 plus accrued interest of $41,880.
Fair value investment in Securities | |
| On May 15, 2018, the Company received 4,000 shares of WTII preferred stock for the use of OriginClear, Inc. technology associated with their proprietary electro water separation system. The stock was valued at fair market value of $0.0075 for a price of $30,000 on the date of issuance. The preferred shares are convertible into 4,000,000 shares of common stock. The Company analysed the licensing agreement using ASU 606 to determine the timing of revenue recognition. The licensing of the intellectual property (IP) 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. As of March 31, 2020, the fair value of the preferred shares was $4,400. |
| 8. | LOANS PAYABLE |
Secured Loans Payable
The Company entered into short term loans with various lenders for capital expansion secured by the Company’s assets in the amount of $1,749,970, which included finance cost of $624,810. The finance cost was fully amortized over the terms of the loans, which have various maturity dates ranging from October 2018 through February 2019. The term of the loans ranged from two months to six months. The net balance as of March 31, 2020 was $366,577.
Promissory Note Payable, Related Party
The Company received an unsecured promissory note on February 6, 2020 for the sum of $5,000. The note bears interest at 10% per annum, with a maturity date of February 6, 2021. Upon maturity the note and accrued interest is to be paid upon the maturity date. The funds were used for operating expenses.
Loan Payable-Related Party
The Company’s CEO loaned the Company $248,870 as of June 28, 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. Principal payments were made in the amount of $21,882, leaving a balance of $165,172 as of March 31, 2020.
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| 9. | CAPITAL LEASES |
The Company entered into a capital lease for the purchase of equipment during the period ended March 31, 2020. The lease is for a sixty (60) month term, with monthly payments of $757 per month, and a purchase option at the end of the lease for $1.00.
As of March 31, 2020, the maturities are summarized as follows:
| Capital lease | $ | 23,889 | ||
| Less current portion | 9,088 | |||
| Total long-term liabilities | $ | 14,801 |
Long term maturities for the next three years are as follows:
| Period Ending March 31, | ||||
| 2021 | 9,088 | |||
| 2022 | 5,713 | |||
| $ | 14,801 | |||
| 10. | FOREIGN SUBSIDIARY |
On December 31, 2014, the Company formed a wholly owned subsidiary, OriginClear Technologies Limited (OCT), in Hong Kong, China. The Company granted OCT a master license for the People’s Republic of China. In turn, OCT is expected to license regional joint ventures for water treatment.
| 11. | COMMITMENTS AND CONTINGENCIES |
Operating Lease
The Company holds an agreement for office space located in Los Angeles, California. The initial agreement was from May 1, 2016 to July 31, 2016 and the term has automatically renewed for successive periods and will continue until terminated in accordance with the agreement.
Facility Rental – Related Party
The Company rents from its subsidiary on a month-to-month basis a 12,000 square foot facility in McKinney, Texas at a base rent of $4,850 per month.
Warranty Reserve
Generally, a PWT project is guaranteed against defects in material and workmanship for one year from the date of completion, while certain areas of construction and materials may have guarantees extending beyond one year. The Company has various insurance policies relating to the guarantee of completed work, which in the opinion of management will adequately cover any potential claims. A warranty reserve has been provided under PWT based on the opinion of management and based on Company history in the amount of $20,000 for the period ending March 31, 2020.
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Litigation
In February 2019, a Complaint was filed in the Superior Court for the State of California, for breach of contract, common counts for sums due for services allegedly performed, and fraud. The Complaint was filed by RDI Financial, LLC (“RDI”), an assignee of Interdependence, Inc., and named the Company and our developmental subsidiary, WaterChain, Inc., as Defendants. RDI claimed that its assignor, Interdependence, Inc., entered into a contract with the Defendants for Interdependence to provide reputation and professional relationship management services. RDI claimed that Interdependence provided the services and that the Company was required to make certain payments of cash and our capital stock to Interdependence, but did not do so. RDI claims to be entitled to enforce the contract as the assignee, and is demanding monetary damages in the aggregate amount of $630,000.
While filed in February, 2019, the Company and WaterChain were unaware of the suit until September of 2019, when they received notice of a default judgment. Litigation counsel was engaged, the absence of prior notice, service of the suit and an improper default promptly challenged, and in October 2019 the Court vacated the default and judgment, and granted the Company and WaterChain leave to file an Answer and Cross-Complaint. Through these filings, the Company and WaterChain, Inc. contest the allegations and claims in the Complaint, and deny that Interdependence performed the required services and contends that we overpaid Interdependence $40,000 for whatever work was done. Specifically, in November, 2019, an Answer was filed denying the claims in the Complaint, along with a Cross-Complaint alleging fraudulent inducement to enter into the contract, negligent misrepresentations, breach of contract, and to rescind the underlying contract. Specifically, we have alleged that Interdependence misrepresented the nature and scope of the services which were to be provided and ability to provide them, misrepresented the results they would obtain from providing such services, and also failed to provide us with the services as required by the contract such that Interdependence was overpaid based on what it in fact did. For those reasons, and prior to any litigation, we terminated the contract for non-performance.
On February 6, 2020, the Superior Court set April 4, 2021 as the trial date for this matter. The Company and WaterChain are appropriately defending against the allegations and pursuing affirmative recovery on the cross-complaint. The Company disputes all claims and is appropriately litigating its defenses and pursuing recovery on its cross-suit. The parties are in the preliminary stages of settlement negotiations with the Plaintiff RDI and Interdependence, but we can provide no assurance that any settlement will be reached nor can we provide any assurances regarding any terms of such settlement. As of date of this report, legal fees and costs in this action have been substantial and it is impossible at this time to predict an exact amount, or even a meaningful estimate, of the aggregate sums that may be incurred in finally resolving or adjudicating this lawsuit.
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| 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 April 28, 2020, and June 22, 2020 holders of convertible promissory notes converted an aggregate principal and interest amount of $45,138 into an aggregate of 1,781,080 shares of the Company’s common stock.
Between April 9, 2020 and April 24, 2020, the Company entered into subscription agreements with certain accredited investors pursuant to which the Company sold an aggregate of 265 shares of the Company’s Series K preferred stock for an aggregate purchase price of $264,517. The Company also issued an aggregate of 132 shares of its Series L preferred stock to the investors.
Between April 2, 2020 and May 11, 2020, the Company sold an aggregate of 3,904 shares of the Company’s Series M preferred stock for an aggregate purchase price of $97,600.
Between April 15, 2020 and April 30, 2020, holders of Series M Preferred Stock converted an aggregate of 320 Series M shares into an aggregate of 137,052 shares of the Company’s common stock.
Between April 30, 2020 and June 30, 2020, the Company issued to consultants and two employees for performance an aggregate of 883,641 shares of the Company’s common stock for services in lieu of cash considerations including 295,141 shares issued in exchange for 6,000,000 shares of Series D-1 preferred stock.
On April 27, 2020, the Company filed a certificate of designation (the “Series O COD”) of Series O Preferred Stock (the “Series O”) and a certificate of designation (the “Series P COD”) of Series P Preferred Stock (the “Series P”) with the Secretary of State of Nevada.
Between May 4, 2020 and May 5, 2020, the Company received loan proceeds in the aggregate amount of $345,000 (the “PPP Loan”) under the Paycheck Protection Program (the “PPP”) under the Coronavirus Aid, Relief and Economic Security Act. The principal and accrued interest under the Note is forgivable after eight weeks if the Company uses the PPP Loan proceeds for eligible purposes, including payroll, benefits, rent and utilities, and otherwise complies with PPP requirements. In order to obtain forgiveness of the PPP Loan, the Company must submit a request and provide satisfactory documentation regarding its compliance with applicable requirements. The Company must repay any unforgiven principal amount of the Note, with interest, on a monthly basis following the Deferral Period. The Company intends to use the proceeds of the PPP Loan specifically for eligible purposes and to pursue forgiveness, although no assurance is provided that forgiveness for all or any portion of the PPP Loan will be obtained.
On May 18, 2020, the Company entered into Restricted Stock Grant Agreements (the “May RSGAs”) with its Chief Executive Officer, T. Riggs Eckelberry, members of the Board, employees and 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 May RSGAs are performance based shares and none have yet vested nor have any been issued. The May RSGAs provide for the issuance of up to an aggregate of 10,500,000 shares of the Company’s common stock as follows: 2,000,000 to Mr. Eckelberry, 500,000 to each of the other three members of the Board, and an aggregate of 7,000,000 to employees and consultants 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 an aggregate of 5,250,000 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 up to an aggregate of 5,250,000 shares of its common stock. As the performance goals are achieved or if alternate vesting is qualified and selected, the shares shall become eligible for vesting and issuance.
On July 2, 2020, the Company issued to Mr. Eckelberry an aggregate of 115,344 shares of common stock per qualifying alternate vesting schedule relating to his May 2016 Restricted Stock Grant Agreement.
On June 12, 2020, a holder of Series J Preferred Stock converted an aggregate of 2.5 Series J shares into an aggregate of 41,541 shares, including make-good shares, of the Company’s common stock.
On June 22, 2020, a holder of Series L Preferred Stock converted an aggregate of 7.5 Series L shares into an aggregate of 126,738 shares, including make-good shares, of the Company’s common stock.
Between June 4, 2020 and July 2, 2020, the Company entered into subscription agreements with certain accredited investors pursuant to which the Company sold an aggregate of 110 shares of the Company’s Series O preferred stock for an aggregate purchase price of $110,000. The Company also issued an aggregate of 55 shares of its Series P preferred stock to the investors.
On July 1, 2020, the Company filed an Amended and Restated Certificate of Designation of Series M Preferred Stock (the “Amended Series M COD”) with the Secretary of State of Nevada. The Amended Series M COD amended the terms of the Company’s Series M Preferred Stock, such that, the Series M Preferred Stock will not be convertible into common stock, and the Company may redeem outstanding shares of Series M Preferred Stock at any time at a redemption price of $37.50 per share (150% of the stated value of $25.00), plus any accrued but unpaid dividends.
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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 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 2535 E. University Drive, McKinney, TX 75069. 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.
On April 21, 2020, OriginClear announced the relocation of its headquarters from California to its PWT unit near Dallas, Texas. Efficiency of operations, personnel and revenue, and the importance of the regional water market were cited as key factors.
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Overview of Business
Our mission is to provide expertise and technology 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 brands to expand our global market presence and our technical expertise. |
| 3. | We develop new business models, such as Investor Water™ and WaterChain™, both of which are designed to help achieve funding for water treatment and management systems. Both projects are in a research and development phase. |
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.
Technology Licensing Division
For its first eight years of operations, OriginClear focused on development and commercialization of its Electro Water Separation™ technology. In 2015, the technology went into commercial phase, and the Company launched it as OriginClear Technologies. 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. The Company had established OriginClear (HK) as its wholly-owned subsidiary in Hong Kong to manage Asia-Pacific market development, but beginning on January 22, 2020, the Company named India’s Permionics as its Strategic Partner for Asia-Pacific Region in an expansion of the existing licensing partnership intended to better address regional opportunities. Permionics is also a key channel partner for PWT. The Company believes this is a more productive way to access the region, and it is in the process of closing OriginClear (HK); OriginClear continues to manage China opportunities from the United States.
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.
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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. We believe 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.
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.
Technology Division Milestones
On December 5, 2019, OriginClear announced that its Spanish partner Depuporc unveiled an integrated manure treatment system using OriginClear technology. The demonstration system processes 30 metric tons per day, with client-validated reduction of contaminants.
On January 22, 2020, OriginClear named India’s Permionics as Strategic Partner for Asia-Pacific Region in an expansion of the existing licensing partnership intended to better address regional opportunities. Permionics is also a key channel partner for PWT.
On June 25, 2020, the Company announced it has entered into an Agency Agreement with AlMansoori Specialized Engineering (MSE), a unit of AlMansoori Group. MSE is the leading provider of oilfield services in the Middle East. Founded in 1977, the company has grown to a skilled workforce of over 3,000 across 24 countries throughout the region.
The alliance is intended to capitalize on efforts by OriginClear’s licensee in Oman, Special Oilfield Services, with which MSE has a joint venture, so that achievements in Oman can be expanded throughout the region.
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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, and creating new players where appropriate, could lead to enormous economies of scale through sharing of best practices, technologies, and customers.
OriginClear seeks to incubate or acquire businesses that help industrial water users treat their water themselves, and often reuse it. We believe that assembling a group of such water treatment and water management businesses is an opportunity for significant growth and increased Company value for the stockholders.
The Company cautions that suitable acquisition candidates may not be identified and even if identified, the Company may not have adequate capital to complete the acquisition and/or definitive agreement may not be reached. Internally-incubated businesses are an ongoing laboratory, and similarly, may not become commercial successes.
Group Development Milestones
Investor Water™
On March 12, 2020, the Company first discussed investor-financed water systems (www.originclear.com/ceo/water-management-increasing-real-estate-value). The concept became a new lab incubation, Investor Water, first outlined in detail on April 9, 2020 (www.originclear.com/ceo/regulation-a-takes-off). A CEO Briefing on April 23, 2020 (www.originclear.com/ceo/rolling-out-investor-water) discussed the first field pilot of the experimental program, a pool-cleaning system rental application. The Company continues to develop this unique marketplace concept to connect investors with secured water projects but cautions that it is still very early; and based on the ongoing experiments, the Company may modify or abandon the program without notice.
Daniel M. Early/Modular Water Systems™
On June 22, 2018, OriginClear signed an exclusive worldwide licensing agreement with Daniel “Dan” Early for his proprietary technology for prefabricated water transport and treatment systems. On July 19, 2018, the Company began incubating its Modular Water Treatment product line (MWS) around Mr. Early’s technology and perspective customers. The Company has funded the development of this product line with internal cash flow. In Q1 of 2020, the Company fully integrated MWS with wholly-owned Progressive Water Treatment Inc. On June 4, 2020, the Company named Daniel Early as Corporate Chief Engineer. One of Early’s key roles will be to provide technology oversight for early stage ventures such as Investor Water.
As disclosed in its annual report, the Company agreed to renew its 2018 license with inventor Daniel M. Early for an additional ten years, for the five patents covering packaged water treatment systems built into containers. We also gained the right to sublicense, and, with Mr. Early’s approval, to create ISO-compliant manufacturing joint ventures.
Water Technologies International
On May 17, 2018, in concert with a purchase of a minority stake in the firm, the Company entered into a licensing agreement with Water Technologies International, Inc. (OTC: WTII), which commercializes the innovative SIMPOD portable waste water treatment plant, and has developed a line of atmospheric water generators. The licensing agreement gave Water Technologies access to OriginClear’s patented electrochemical treatment process, Electro Water Separation with Advanced Oxidation™ (EWS:AOx™), and support to enter the oil and gas and other markets. The Technical Assistance Program fee, another part of OriginClear’s licensing agreement, was paid to OCLN in WTII preferred shares. The license also calls for standard royalty payments to OriginClear. OCLN has retained these shares, while the two organizations are not actively collaborating today.
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WaterChain, Inc.
WaterChain, Inc. was incorporated in December 2017 and is today a research and development project of the Company.
Progressive Water Treatment Inc.
On October 1, 2015, the Company completed its acquisition of Dallas-based Progressive Water Treatment Inc. (“PWT”), a designer, builder and service provider for a wide range of industrial water treatment applications.
With the PWT and future potential acquisitions, the creation of the Modular Water Systems product line as an integral part of PWT, and integrating its proprietary technology, OriginClear aims to offer a complementary, end-to-end offering to serve growing corporate demand for outsourced water treatment.
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. PWT designs and manufactures a complete line of water treatment systems for municipal, industrial and pure water applications. Its uniqueness is its ability to gain an in-depth understanding of customer’s needs and then to design and build an integrated water treatment system using multiple technologies to provide a complete, not partial solution.
To help address customer needs, PWT utilizes a wide range of technologies, including chemical injection, media filters, membrane, ion exchange and SCADA (supervisory control and data acquisition) technology in turnkey systems. The Company also offers a broad range of services including maintenance contracts, retrofits and replacement assistance. In addition, PWT rents equipment in contracts of varying duration. Customers are primarily served in the United States and Canada, with the company’s reach extending worldwide from Siberia to Argentina to the Middle East.
PWT is also a certified manufacturer of products using OriginClear’s proprietary Electro Water Separation™ and Advanced Oxidation (AOx™) technologies, building these on behalf of OriginClear licensees.
PWT Milestones
In the first quarter of 2019, the Company increased the number of the manufacturer’s representatives for its operating units, PWT and Modular Water Systems (“MWS”).
On Nov 7, 2019, OriginClear published a case study showing how its Modular Water System may help automotive dealership expand into rural land. The case study shows how point-of-use treatment solves lack of access to the public sewer system.
On March 5, 2020, OriginClear announced disruptive pump and lift station pricing, stating that its prefabricated modules with a lifespan of up to 100 years now compete with precast concrete.
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Modular Water Systems
On July 19, 2018, the Company announced the launch of its Modular Water Treatment product line, offering a unique product line of prefabricated water transport and treatment systems. Daniel “Dan” Early P.E. (Professional Engineer) heads the project and along with the intellectual property, which the Company licensed exclusively worldwide for three years (since renewed for ten years beginning in 2020, with sublicensing rights), brought a following of prospective customers. On July 25, 2018, MWS received its first order, for a brewery wastewater treatment plant.
With PWT and other companies as fabricators and assemblers, MWS designs, manufactures and delivers prefabricated water transport (pump stations) and wastewater treatment plant (“WWTP”) products to customers and end-users that have to clean their own wastewater. It uses Structurally Reinforced Thermoplastic (“SRTP”) materials to focus on patented developing water and wastewater collection, conveyance, and treatment systems that have high performance and sustainability. Typical customers may 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. Mr. Early’s inventions have led to the patented Wastewater System & Method and four other patents, which OriginClear has licensed exclusively for the world.
Dan Early has been designing and building prepackaged pump stations and municipal wastewater treatment systems for over five years, with a career background of more than two decades of water engineering experience.
MWS designs, manufactures and implements advanced prepackaged wastewater treatment, pump stations and custom systems with primary focus on decentralized opportunities away from the very competitive large municipal wastewater treatment plants. These decentralized opportunities include: rural communities, housing developments, industrial sites, schools and many more.
Today, MWS is fully integrated with PWT in Texas.
Patents
On June 25, 2018, Daniel Early granted the Company a worldwide, exclusive non-transferable license to intellectual property consisting of five issued US patents, and design software, CAD, marketing, design and specification documents (“Early IP”).
On May 20, 2020, we agreed on a renewal of the license for an additional ten years, with three-year extensions. We also gained the right to sublicense, and, with approval, to create ISO-compliant manufacturing joint ventures. All royalties surviving the 2018 license were settled.
We may contract with distribution channels (equipment distributors, oil service companies, water treatment companies, system integrators and engineering companies) of our choice to act on our behalf for the purpose of selling and integrating the Early IP.
The Early IP consists of combined protection on the materials and configurations of complete packaged water treatment systems, built into containers. The parents consist of the following:
| # | Description | Patent No. | Date Patent Issued | Expiration Date | ||||
| 1 | Wastewater System & Method | US 8,372,274 B2 Applications: WIPO, Mexico | 02/12/13 | 07/16/31 | ||||
| 2 | Steel Reinforced HDPE Rainwater Harvesting | US 8,561,633 B2 | 10/22/13 | 05/16/32 | ||||
| 3 | Wastewater Treatment System CIP | US 8,871,089 B2 | 10/28/14 | 05/07/32 | ||||
| 4 | Scum Removal System for Liquids | US 9,205,353 B2 | 12/08/15 | 02/19/34 | ||||
| 5 | Portable, Steel Reinforced HDPE Pump Station CIP | US 9,217,244 B2 | 12/22/15 | 10/20/31 |
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With the rising need for local, point-of-use or point-of-discharge water treatment solutions, the Modular Water Systems licensed IP family is the core to a portable, integrated, transportable, plug-and-play system that, unlike other packaged solutions, can be manufactured in series, have a longer life and are more respectful of the environment.
The common feature of this IP family is the use of a construction material (SRTP), for the containers that is:
| ● | more durable: an estimated 75 to 100-year life cycle as opposed to a few decades for metal, or 40 to 50 years maximum for concrete; |
| ● | easier to manufacture: vessels manufacturing process can be automated; and |
| ● | recyclable and can be made out of biomaterials |
In addition, patents US 8,372,274 and US 8,871,089 (1 and 3) relate to the use of vessels or containers made out of this material combined with a configuration of functional modules, or process, for general water treatment.
Other subsequent patents, while keeping the original claims and therefore making them stronger, focus on more targeted applications. These patents outline a given combination of modules engineered inside the vessel to address a specific water treatment challenge.
Expansion of the PWT and MWS Business-Lines
Beginning with its first installation, PWT built MWS components. PWT and MWS are now fully integrated as a single profit and manufacturing center.
In April 2019, we completed the expansion of our manufacturer’s representative network to serve both PWT and MWS for customer lead generation.
On June 1, 2020, the Company reported sales stable amid COVID-19 recovery, and that it has dedicated the duties of Chief Operating Officer Tom Marchesello, to seeking to increase revenues from existing profit centers of PWT and MWS at its Texas headquarters.
On June 4, 2020, the Company announced it named Daniel Early as Corporate Chief Engineer, the two-year integration process of Early’s modular patents now considered complete. In this capacity, Early oversees and supports PWT and MWS, in addition to the creation of corporate brands and supporting the Investor Water startup technically.
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.
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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.
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 March 31, 2020, the amounts reported for cash, prepaid expenses, accounts payable and accrued expenses approximate the fair value because of their short maturities.
Recently Issued Accounting Pronouncements
Management reviewed currently issued pronouncements during the three months ended March 31, 2020, and does not believe that any recently issued, but not yet effective, accounting standards if currently adopted would have a material effect on the accompanying condensed financial statements.
Results of Operations for the three months ended March 31, 2020 compared to the three months ended March 31, 2019.
Revenue and Cost of Sales
For the three months ended March 31, 2020, we had revenue of $1,092,438 compared to $742,043 for the three months ended March 31, 2019. Cost of sales for the three months ended March 31, 2020 was $879,145 compared to $723,263 for the three months ended March 31, 2019. Revenue and cost of sales increased primarily due to our subsidiary’s increase in revenue, due to focusing on marketing of its products.
Our gross profit was $213,293 and $18,780 for the three months ended March 31, 2020 and 2019, respectively.
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Selling and Marketing Expenses
For the three months ended March 31, 2020, we had selling and marketing expenses of $374,923, compared to $482,659 for the three months ended March 31, 2019. The decrease in selling and marketing expenses was primarily due to a decrease in marketing and investor relations expense.
General and Administrative Expenses
For the three months ended March 31, 2020, we had general and administrative expenses of $549,911 compared to $587,070 for the three months ended March 31, 2019. The decrease in general and administrative expenses was primarily due to a decrease in professional fees, outside services and overall cost cutting measures.
Research and Development Cost
For the three months ended March 31, 2020, our research and development cost was $28,982 compared to $23,950 for the three months ended March 31, 2019. The increase in research and development costs was primarily due to an increase in salary expense.
Other Income and (Expenses)
Other income and (expenses) increased by $21,598,942 to $22,353,298 for the three months ended March 31, 2020, compared to $754,356 for the three months ended March 31, 2019. The increase was due primarily to an increase in non-cash accounts associated with the fair value of the derivatives in the amount of $20,586,281, a decrease in commitment fees of $34,378, a decrease in loss on conversion of debt in the amount of $514,404, a decrease in loss on settlement of debt in the amount of $314,295, a decrease in unrealized loss on investment securities in the amount of $2,000, decrease in interest expense of $161,391, and a decrease in other income of $15,036, with an increase in gain on conversion of preferred stock of $1,229.
Net Income/(Loss)
Our net income increased by $21,932,686 to $21,601,414 for the three months ended March 31, 2020, compared to a net loss of $(331,272) for the prior three months ended March 31, 2019. The majority of the increase in net income was due primarily to an increase in other expenses associated with the net change in derivative instruments estimated each period. These estimates are based on multiple inputs, including the market price of our stock, interest rates, our stock price, volatility, variable conversion prices based on market prices defined in the respective agreements and probabilities of certain outcomes based on managements’ estimates. These inputs are subject to significant changes from period to period, therefore, the estimated fair value of the derivative liabilities will fluctuate from period to period, and the fluctuation may be material.
Liquidity and Capital Resources
Liquidity is the ability of a company to generate funds to support its current and future operations, satisfy its obligations, and otherwise operate on an ongoing basis. Significant factors in the management of liquidity are funds generated by operations, levels of accounts receivable and accounts payable and capital expenditures.
The condensed 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, raising additional capital and increasing sales. We obtained funds from investors during the three months ending March 31, 2020. 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 restrictions on our operations, in the case of debt financing, or cause substantial dilution for our stockholders, in case of equity financing.
In connection with our sale of Series M Preferred Stock conducted under Regulation A under the Securities Act, we may be subject to claims for rescission. If this occurs, it may have a material negative effect on our liquidity.
At March 31, 2020 and December 31, 2019, we had cash of $297,300 and $490,614, respectively, and working capital deficit of $15,174,987 and $38,598,414, respectively. The decrease in working capital deficit was due primarily to a decrease in non-cash derivative liabilities and convertible notes, a decrease in cash, contracts receivable, prepaid expenses, contracts liabilities, capital lease and loans payable, with an increase in accounts payable, accrued expenses, contract assets, and convertible note receivable. ..
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During the period ended March 31, 2020, we raised an aggregate of $795,250 from the sale of preferred stock in private placements. 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 $926,200 for the three months ended March 31, 2020, compared to $705,621 for the prior period ended March 31, 2019. The increase in cash used in operating activities was primarily due to an increase in contract liabilities and accounts payable.
Net cash flows provided by investing activities for the three months ended March 31, 2020 and 2019, were $0 and $19,035, respectively. The decrease in investing activities was due to a decrease in net change in fair value of investment.
Net cash flows provided by financing activities was $732,886 for the three months ended March 31, 2020, as compared to $418,642 for the three months ended March 31, 2019. The increase in cash provided by financing activities was due primarily to an increase in proceeds for issuance of preferred stock, and cumulative dividends payable, with a decrease in debt financing through convertible promissory notes. To date we have principally financed our operations through the sale of our common and preferred 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 securities together with revenue from operations are currently sufficient to fund our operating expenses in the near future, we will need to raise additional funds in the future so that we can expand our operations. Therefore, our future operations are dependent on our ability to secure additional financing, which may not be available on acceptable terms, or at all. Financing transactions may include the issuance of equity or debt securities, obtaining credit facilities, or other financing mechanisms. Furthermore, if we issue additional equity or debt securities, stockholders may experience additional dilution or the new equity securities may have rights, preferences or privileges senior to those of existing holders of our common stock. The inability to obtain additional capital may restrict our ability to grow and may reduce our ability to continue to conduct business operations. If we are unable to obtain additional financing, we may have to curtail our marketing and development plans and possibly cease our operations.
We have estimated our current average burn, and believe that we have assets to ensure that we can function without liquidation for a limited time, 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 immediate future and will be able to realize assets and discharge liabilities in the normal course of operations. However, there cannot be any assurance that any of the aforementioned assumptions will come to fruition and as such we may only be able to function for a short time.
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.
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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
We carried out an evaluation, under the supervision and with the participation of our management, including our principal executive officer and principal financial officer, of the effectiveness of our disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)). Based upon that evaluation, our principal executive officer and principal financial officer concluded that, as of the end of the period covered in this report, due to small staff size, our disclosure controls and procedures were ineffective to ensure that information required to be disclosed in reports filed under the Exchange Act, is recorded, processed, summarized and reported within the required time periods specified in the SEC’s rules and forms and is accumulated and communicated to our management, including our principal executive officer and principal financial officer, as appropriate to allow timely decisions regarding required disclosure.
To address the deficiency, we performed additional analysis and other post-closing procedures in an effort to ensure our consolidated financial statements included in this quarterly report have been prepared in accordance with generally accepted accounting principles. Accordingly, management believes that the financial statements included in this report fairly present in all material respects our financial condition, results of operations and cash flows for the periods presented.
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 fiscal quarter ended March 31, 2020 that has materially affected, or are reasonably likely to materially affect, the our 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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In February 2019, a Complaint was filed in the Superior Court for the State of California, for breach of contract, common counts for sums due for services allegedly performed, and fraud. The Complaint was filed by RDI Financial, LLC (“RDI”), an assignee of Interdependence, Inc., and named the Company and our developmental subsidiary, WaterChain, Inc., as Defendants. RDI claimed that its assignor, Interdependence, Inc., entered into a contract with the Defendants for Interdependence to provide reputation and professional relationship management services. RDI claimed that Interdependence provided the services and that the Company was required to make certain payments of cash and our capital stock to Interdependence, but did not do so. RDI claims to be entitled to enforce the contract as the assignee, and is demanding monetary damages in the aggregate amount of $630,000.
While filed in February, 2019, the Company and WaterChain were unaware of the suit until September of 2019, when they received notice of a default judgment. Litigation counsel was engaged, the absence of prior notice, service of the suit and an improper default promptly challenged, and in October 2019 the Court vacated the default and judgment, and granted the Company and WaterChain leave to file an Answer and Cross-Complaint. Through these filings, the Company and WaterChain, Inc. contest the allegations and claims in the Complaint, and deny that Interdependence performed the required services and contends that we overpaid Interdependence $40,000 for whatever work was done. Specifically, in November, 2019, an Answer was filed denying the claims in the Complaint, along with a Cross-Complaint alleging fraudulent inducement to enter into the contract, negligent misrepresentations, breach of contract, and to rescind the underlying contract. Specifically, we have alleged that Interdependence misrepresented the nature and scope of the services which were to be provided and ability to provide them, misrepresented the results they would obtain from providing such services, and also failed to provide us with the services as required by the contract such that Interdependence was overpaid based on what it in fact did. For those reasons, and prior to any litigation, we terminated the contract for non-performance.
On February 6, 2020, the Superior Court set April 4, 2021 as the trial date for this matter. The Company and WaterChain are appropriately defending against the allegations and pursuing affirmative recovery on the cross-complaint. The Company disputes all claims and is appropriately litigating its defenses and pursuing recovery on its cross-suit. The parties are in the preliminary stages of settlement negotiations with the Plaintiff RDI and Interdependence, but we can provide no assurance that any settlement will be reached nor can we provide any assurances regarding any terms of such settlement. As of date of this report, legal fees and costs in this action have been substantial and it is impossible at this time to predict an exact amount, or even a meaningful estimate, of the aggregate sums that may be incurred in finally resolving or adjudicating this lawsuit.
In addition to the other information set forth in this report you should carefully consider the factors discussed under “Risk Factors” in our annual report on Form 10-K for the year ended December 31, 2019. The risks discussed in our 2019 annual report and described below could materially affect our business, financial condition and future results.
The COVID-19 pandemic may negatively affect our operations.
The COVID-19 pandemic may negatively affect our operations. The Covid-19 pandemic has resulted in social distancing, travel bans and quarantine, which has limited access to our facilities, customers, management, support staff and professional advisors. These factors, in turn, may not only impact our operations, financial condition and demand for our goods and services but our overall ability to react timely to mitigate the impact of this event. These factors have hampered our efforts to comply with our filing obligations with the Securities and Exchange Commission.
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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.
Not applicable.
| Exhibit Number |
Description of Exhibit | |
| 3.1 | Amended and Restated Certificate of Designation of Series M Preferred Stock* | |
| 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.* |
* Filed herewith.
** Furnished herewith.
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Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
| July 6, 2020 | ORIGINCLEAR, INC. |
| /s/ T. Riggs Eckelberry | |
| T. Riggs Eckelberry | |
| Chief Executive Officer | |
| (Principal Executive Officer) and | |
| Acting Chief Financial Officer | |
| (Principal Accounting and Financial Officer) |
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Exhibit 3.1
AMENDED AND RESTATED CERTIFICATE OF DESIGNATION
OF
ORIGINCLEAR, INC.
ESTABLISHING THE DESIGNATIONS, PREFERENCES,
LIMITATIONS AND RELATIVE RIGHTS OF ITS
SERIES M PREFERRED STOCK
This Amended and Restated Certificate of Designation of OriginClear, Inc. amends and restates the Certificate of Designation of Series M Preferred Stock filed by the Company on December 11, 2019.
OriginClear, Inc. (the “Company”), a corporation organized and existing under the laws of Nevada, does hereby certify that, pursuant to authority conferred upon the Board of Directors of the Company by the Articles of Incorporation of the Company, it has adopted resolutions (a) authorizing the issuance of up to eight hundred thousand (800,000) shares of Series M Preferred Stock of the Company and (b) providing for the designations, preferences and relative participating, optional or other rights, and the qualifications, limitations or restrictions thereof, as follows:
SECTION 1. DESIGNATION OF SERIES. There shall hereby be created and established a series of “Series M Preferred Stock” and the number of shares initially constituting such series shall be up to eight hundred thousand (800,000) shares.
SECTION 2. STATED VALUE. The Stated Value of the Series M Preferred Stock will be $25.00 per share.
SECTION 3. DIVIDENDS. The holders of outstanding shares of Series M Preferred Stock (the “Holders”) will be entitled to receive, out of any funds and assets of the Company legally available therefor, dividends payable monthly, at the annual rate of 10% of the Stated Value, payable in preference and priority to any payment of any dividend of the common stock of the Company (the “Common Stock”). The monthly record and payment date for such dividends will be set by the Board of Directors of the Company. The right to such dividends of the Holders of Series M Preferred Stock will be cumulative.
SECTION 4. LIQUIDATION. Upon any liquidation, dissolution or winding- up of the Company, the Series M Preferred Stock will entitle the Holders, out of the assets of the Company available for distribution to its shareholders upon such liquidation, an amount equal to the Stated Value, for each share of Series M Preferred Stock, plus any accrued but unpaid dividends on such shares, before any payment may be made or any assets distributed to the holders of the Common Stock.
SECTION 5. VOTING AND PROTECTIVE PROVISIONS. (a) Except as required by law or as specifically provided herein, the Holders of Series M Preferred Stock will not be entitled to vote, as a separate class or otherwise, on any matter presented to the stockholders of the Company for their action or consideration at any meeting of stockholders of the Company (or by written consent of stockholders in lieu of meeting).
(b) So long as any shares of Series M Preferred Stock remain outstanding, the Company will not, without first obtaining the approval (by vote or written consent, as provided by law) of the Holders of at least a majority of the then outstanding shares of Series M Preferred Stock voting together as one class, alter or change the rights, preferences or privileges of the shares of the Series M Preferred Stock so as to affect materially and adversely such shares.
SECTION 6. REDEMPTION.
The Company may in its sole discretion (to the extent it may lawfully do so), at any time, redeem any outstanding shares of Series M Preferred Stock at a price equal to 150% of the Stated Value plus any accrued but unpaid dividends thereon. In the event the Company exercises such redemption right for less than all of the then-outstanding shares of Series M Preferred Stock, the Company shall redeem the outstanding shares of the Holders of a pro rata basis. The Company may exercise such redemption right at any time by providing 30 days’ prior written notice of such redemption and payment of the redemption price to the Holders. Upon payment of the redemption price by the Company in accordance herewith, the shares of Series M Preferred Stock that have been redeemed will revert to the status of authorized but unissued preferred stock.
SECTION 7. NOTICES. Any notice required hereby to be given to the Holders shall be deemed given if deposited in the United States mail, postage prepaid, or provided by fax or e-mail, to the Holders of record at their respective addresses appearing on the books of the Company. Any notice to the Company will be by United States mail, postage prepaid, or provided by e-mail to the address below:
OriginClear, Inc.
355 So. Grand Avenue
Suite 2450 PMB #1051
Los Angeles, CA 90071
Email: riggs@originclear.com
SECTION 8. MISCELLANEOUS.
(a) The headings of the various sections and subsections of this Certificate of Designation are for convenience of reference only and shall not affect the interpretation of any of the provisions of this Certificate of Designation.
(b) Whenever possible, each provision of this Certificate of Designation shall be interpreted in a manner as to be effective and valid under applicable law and public policy. If any provision set forth herein is held to be invalid, unlawful or incapable of being enforced by reason of any rule of law or public policy, such provision shall be ineffective only to the extent of such prohibition or invalidity, without invalidating or otherwise adversely affecting the remaining provisions of this Certificate of Designation. No provision herein set forth shall be deemed dependent upon any other provision unless so expressed herein. If a court of competent jurisdiction should determine that a provision of this Certificate of Designation would be valid or enforceable if a period of time were extended or shortened, then such court may make such change as shall be necessary to render the provision in question effective and valid under applicable law.
(c) Except as may otherwise be required by law, the Series M Preferred Stock shall not have any powers, designations, preferences or other special rights, other than those specifically set forth in this Certificate of Designation.
Exhibit 31
CERTIFICATION
I, T Riggs Eckelberry, certify that:
1. I have reviewed this quarterly report on Form 10-Q of OriginClear, Inc., for the quarter ended March 31, 2020;
2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;
3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;
4. The registrant’s other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f) for the registrant and have:
(a) designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant is made known to us by others, particularly during the period in which this report is being prepared;
(b) designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;
(c) evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and
(d) disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and
5. The registrant’s other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent function):
(a) all significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and
(b) any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.
| July 6, 2020 | /s/ T. Riggs Eckelberry |
| T. Riggs Eckelberry | |
| Chief
Executive Officer (Principal Executive Officer) and | |
| Acting
Chief Financial Officer (Principal Accounting and Financial Officer) |
Exhibit 32
CERTIFICATION PURSUANT TO
18 U.S.C. SECTION 1350,
AS ADOPTED PURSUANT TO
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
In connection with the Quarterly Report of OriginClear, Inc. (the “Company”) on Form 10-Q for the quarter ended March 31, 2020 as filed with the Securities and Exchange Commission on the date hereof (the “Report”), I, T. Riggs Eckelberry, Chief Executive Officer and Acting Chief Financial Officer of the Company, certify, pursuant to 18 U.S.C. section 906 of the Sarbanes-Oxley Act of 2002, that:
(1) The Report fully complies with the requirements of section 13(a) or 15(d) of the Securities and Exchange Act of 1934; and
(2) The information contained in the Report fairly presents, in all material respects, the financial condition and result of operations of the Company.
| July 6, 2020 | By: | /s/ T. Riggs Eckelberry |
| T. Riggs Eckelberry | ||
| Chief
Executive Officer (Principal Executive Officer) and | ||
| Acting
Chief Financial Officer (Principal Financial Officer) |