Originclear, Inc 10-Q for FY2021 Q1
Originclear, Inc. (OCLN)
About this 10-Q
Originclear, Inc filed this 10-Q on August 4, 2021, covering the quarter ended March 31, 2021 (FY2021 Q1).
Headline figures
Quarter ended March 31, 2021, as reported in this filing, compared with the same period a year earlier where the filing states it.
- Revenue
- $796.18K
- down 27.1% from $1.09M a year earlier
- Net loss
- $19.9M
- compared with net income of $21.6M a year earlier
- Diluted EPS
- -$0.19
- compared with $0.22 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, 2021
☐ 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.) |
13575 58th Street North
Suite 200
Clearwater, FL 33760
(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, a 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 August 3, 2021 there were 194,042,516 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. | 26 |
| Item 3. | Quantitative and Qualitative Disclosures About Market Risk. | 37 |
| Item 4. | Controls and Procedures. | 37 |
| PART II | 38 | |
| Item 1. | Legal Proceedings. | 38 |
| Item 1A. | Risk Factors. | 40 |
| Item 2. | Unregistered Sales of Equity Securities and Use of Proceeds. | 40 |
| Item 3. | Defaults Upon Senior Securities. | 40 |
| Item 4. | Mine Safety Disclosures. | 40 |
| Item 5. | Other Information. | 40 |
| Item 6. | Exhibits. | 40 |
| SIGNATURES | 41 | |
i
PART I - FINANCIAL INFORMATION
ORIGINCLEAR, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
| March 31, 2021 | December 31, 2020 | |||||||
| (Unaudited) | ||||||||
| ASSETS | ||||||||
| CURRENT ASSETS | ||||||||
| Cash | $ | 539,731 | $ | 409,591 | ||||
| Restricted cash - Preferred shares | 18,426 | 6,530 | ||||||
| Contracts receivable | 505,458 | 438,430 | ||||||
| Contract assets | 70,433 | 148,734 | ||||||
| Inventory assets | 1,900 | - | ||||||
| Other receivable | 5,114 | 3,799 | ||||||
| Prepaid expenses | 13,223 | 52,728 | ||||||
| TOTAL CURRENT ASSETS | 1,154,285 | 1,059,812 | ||||||
| NET PROPERTY AND EQUIPMENT | 246,576 | 258,206 | ||||||
| OTHER ASSETS | ||||||||
| Long term asset for sale | 630,000 | - | ||||||
| Fair value investment-securities | 53,200 | 8,000 | ||||||
| Trademark | 4,467 | 4,467 | ||||||
| TOTAL OTHER ASSETS | 687,667 | 12,467 | ||||||
| TOTAL ASSETS | $ | 2,088,528 | $ | 1,330,485 | ||||
| LIABILITIES AND SHAREHOLDERS' DEFICIT | ||||||||
| Current Liabilities | ||||||||
| Accounts payable and other payable | $ | 1,306,026 | $ | 1,304,803 | ||||
| Accrued expenses | 1,537,209 | 1,542,816 | ||||||
| Cumulative preferred stock dividends payable | 273,869 | 256,274 | ||||||
| Contract liabilities | 324,479 | 340,551 | ||||||
| Capital lease, current portion | 9,088 | 9,088 | ||||||
| Customer deposit | 146,453 | 146,453 | ||||||
| Warranty reserve | 20,000 | 20,000 | ||||||
| Loan payable, merchant cash advance | 342,896 | 342,896 | ||||||
| Loan payable, related party | 71,136 | 94,883 | ||||||
| Loans payable, SBA | 505,000 | 505,000 | ||||||
| Derivative liabilities | 28,016,667 | 12,310,307 | ||||||
| Series F 8% Preferred Stock, 175 shares issued and outstanding, redeemable value of $175,000 and $175,000 respectively | 175,000 | 175,000 | ||||||
| Series F 8% Preferred Stock, 100 shares issued and outstanding, redeemable value of $100,000 and $100,000 respectively | 100,000 | 100,000 | ||||||
| Series G 8% Preferred Stock, 220 and 430 shares issued and outstanding, respectively, redeemable value of $220,000 and $430,000, respectively | 220,000 | 430,000 | ||||||
| Series I 8% Preferred Stock, 725 and 797 shares issued and outstanding, respectively, redeemable value of $725,000 and $797,400, respectively | 725,000 | 797,400 | ||||||
| Series K 8% Preferred Stock, 2,677 and 3,160 shares issued and outstanding, respectively, redeemable value of $2,676,650 and $3,160,417, respectively | 2,676,650 | 3,160,417 | ||||||
| Convertible promissory notes, net of discount of $57,854 and $17,929, respectively | 2,136,004 | 1,223,228 | ||||||
| Total Current Liabilities | 38,585,477 | 22,759,116 | ||||||
| Long Term Liabilities | ||||||||
| Capital lease, long term portion | 5,713 | 7,985 | ||||||
| Convertible promissory notes, net of discount of $0 and $0, respectively | 932,275 | 1,877,275 | ||||||
| Total Long Term Liabilities | 937,988 | 1,885,260 | ||||||
| Total Liabilities | 39,523,465 | 24,644,376 | ||||||
| COMMITMENTS AND CONTINGENCIES (See Note 11) | ||||||||
| Series J Convertible Preferred Stock, 240 and 273 shares issued and outstanding, respectively, redeemable value of $240,000 and $272,500, respectively | 240,000 | 272,500 | ||||||
| Series L Convertible Preferred Stock, 831 and 1,132 shares issued and outstanding, respectively redeemable value of 830,825 and 1,132,084, respectively | 830,825 | 1,132,084 | ||||||
| Series M Preferred Stock, 40,340 and 42,213 shares issued and outstanding, respectively, redeemable value of $1,009,750 and $1,060,325, respectively | 1,009,750 | 1,060,325 | ||||||
| Series O 8% Convertible Preferred Stock, 1,406 and 1,995 shares issued and outstanding, respectively, redeemable value of $1,405,500 and $1,995,000, respectively | 1,405,500 | 1,995,000 | ||||||
| Series P Convertible Preferred Stock, 231 and 357 shares issued and outstanding, respectively redeemable value of $230,500 and $356,500, respectively | 230,500 | 356,500 | ||||||
| Series Q 12% Convertible Preferred Stock, 951 and 1,025 shares issued and outstanding, respectively, redeemable value of $951,000 and $1,025,000, respectively | 951,000 | 1,025,000 | ||||||
| Series R 10% Convertible Preferred Stock, 2,268 and 490 shares issued and outstanding, respectively, redeemable value of $2,267,667 and $490,000, respectively | 2,267,667 | 490,000 | ||||||
| Series S 10% Convertible Preferred Stock, 165 and 0 shares issued and outstanding, respectively, redeemable value of $165,000 and $0, respectively | 165,000 | - | ||||||
| Series T 10% Convertible Preferred Stock, 630 and 0 shares issued and outstanding, respectively, redeemable value of $630,000 and $0, respectively | 630,000 | |||||||
| 7,730,242 | 6,331,409 | |||||||
| SHAREHOLDERS' DEFICIT | ||||||||
| Preferred stock, $0.0001 par value, 550,000,000 shares authorized, 1,000 shares of Series C issued and outstanding, respectively | - | - | ||||||
| 32,500,000 shares of Series D-1 issued and outstanding, respectively | 3,250 | 3,250 | ||||||
| 1,537,213 shares of Series E issued and outstanding, respectively | 154 | 154 | ||||||
| Subscription payable to purchase | 100,000 | 100,000 | ||||||
| Preferred treasury stock,1,000 and 1,000 shares outstanding, respectively | - | - | ||||||
| Common stock, $0.0001 par value, 16,000,000,000 shares authorized, 112,898,030 and 65,052,688 shares issued and outstanding, respectively | 11,289 | 6,505 | ||||||
| Additional paid in capital - Common stock | 68,635,978 | 64,265,217 | ||||||
| Accumulated other comprehensive loss | (132 | ) | (132 | ) | ||||
| Accumulated deficit | (113,915,718 | ) | (94,020,294 | ) | ||||
| TOTAL SHAREHOLDERS' DEFICIT | (45,165,179 | ) | (29,645,300 | ) | ||||
| TOTAL LIABILITIES AND SHAREHOLDERS' DEFICIT | $ | 2,088,528 | $ | 1,330,485 | ||||
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, 2021 AND 2020
(Unaudited)
| Three Months Ended | ||||||||
| March 31, 2021 | March 31, 2020 | |||||||
| Sales | $ | 796,178 | $ | 1,092,438 | ||||
| Cost of Goods Sold | 691,521 | 879,145 | ||||||
| Gross Profit | 104,657 | 213,293 | ||||||
| Operating Expenses | ||||||||
| Selling and marketing expenses | 431,508 | 374,923 | ||||||
| General and administrative expenses | 818,553 | 549,911 | ||||||
| Research and development | - | 28,982 | ||||||
| Depreciation and amortization expense | 11,631 | 11,361 | ||||||
| Total Operating Expenses | 1,261,692 | 965,177 | ||||||
| Loss from Operations | (1,157,035 | ) | (751,884 | ) | ||||
| OTHER INCOME (EXPENSE) | ||||||||
| Other income | 1 | 4,000 | ||||||
| Loss on exchange of preferred stock | (40,000 | ) | - | |||||
| (Loss) gain on conversion of preferred stock | (790,812 | ) | 1,229 | |||||
| Unrealized gain (loss) on investment securities | 45,200 | (5,200 | ) | |||||
| (Loss) gain on net change in derivative liability and conversion of debt | (15,651,708 | ) | 22,530,870 | |||||
| Interest expense | (263,221 | ) | (177,601 | ) | ||||
| TOTAL OTHER (EXPENSE) INCOME | (16,700,540 | ) | 22,353,298 | |||||
| NET (LOSS) INCOME | $ | (17,857,575 | ) | $ | 21,601,414 | |||
| Warrants deemed dividends | $ | (2,037,849 | ) | $ | - | |||
| NET (LOSS) INCOME ATTRIBUTABLE TO SHAREHOLDERS | $ | (19,895,424 | ) | $ | 21,601,414 | |||
| BASIC (LOSS) EARNINGS PER SHARE ATTRIBUTABLE TO SHAREHOLDERS' | $ | (0.19 | ) | $ | 3.33 | |||
| DILUTED (LOSS) EARNINGS PER SHARE ATTRIBUTABLE TO SHAREHOLDERS' | $ | (0.19 | ) | $ | 0.22 | |||
| WEIGHTED-AVERAGE COMMON SHARES OUTSTANDING, | ||||||||
| BASIC | 91,595,414 | 6,494,377 | ||||||
| DILUTED | 91,595,414 | 100,433,377 | ||||||
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, 2021 AND 2020
| THREE MONTHS ENDED MARCH 31, 2020 | ||||||||||||||||||||||||||||||||||||||||
| Accumulated | ||||||||||||||||||||||||||||||||||||||||
| Additional | Other | |||||||||||||||||||||||||||||||||||||||
| Preferred stock | Common stock | Paid-in- | Subscription | Comprehensive | Accumulated | Mezzanine | ||||||||||||||||||||||||||||||||||
| Shares | Amount | Shares | Amount | Capital | Payable | loss | Deficit | Total | Equity | |||||||||||||||||||||||||||||||
| Balance at December 31, 2019 | 40,674,799 | $ | 4,067 | 4,854,993 | $ | 486 | $ | 64,915,364 | $ | - | $ | (134 | ) | $ | (107,281,659 | ) | $ | (42,361,876 | ) | $ | 2,204,025 | |||||||||||||||||||
| 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 | - | - | 875,238 | 88 | 42,412 | - | - | - | 42,500 | 42,500 | ||||||||||||||||||||||||||||||
| Issuance of Series K Preferred stock | - | - | - | - | - | - | - | - | - | 795,250 | ||||||||||||||||||||||||||||||
| Issuance of Series L Preferred stock through a private placement associated with the Series k Preferred note | - | - | - | - | - | - | - | - | - | 447,620 | ||||||||||||||||||||||||||||||
| Exchange of Series G Preferred stock to Series K Preferred stock | - | - | - | - | (100 | ) | - | - | - | (100 | ) | 100,000 | ||||||||||||||||||||||||||||
| Exchange of Series G Preferred stock to Series L Preferred stock | - | - | - | - | - | - | - | - | - | 50,000 | ||||||||||||||||||||||||||||||
| Reclassification of non-cash adjustment | - | - | - | - | (46,260 | ) | - | - | - | (46,260 | ) | |||||||||||||||||||||||||||||
| Reclassification to mezzanine | - | - | - | - | (42,400 | ) | - | - | - | (42,400 | ) | 1,933,055 | ||||||||||||||||||||||||||||
| 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 | 40,072,363 | 4,007 | 8,563,384 | $ | 857 | 65,007,176 | $ | - | (133 | ) | (85,680,245 | ) | (20,668,338 | ) | $ | 5,572,450 | ||||||||||||||||||||||||
| THREE MONTHS ENDED MARCH 31, 2021 | ||||||||||||||||||||||||||||||||||||||||
| Accumulated | ||||||||||||||||||||||||||||||||||||||||
| Additional | Other | |||||||||||||||||||||||||||||||||||||||
| Preferred stock | Common stock | Paid-in- | Subscription | Comprehensive | Accumulated | Mezzanine | ||||||||||||||||||||||||||||||||||
| Shares | Amount | Shares | Amount | Capital | Payable | loss | Deficit | Total | Equity | |||||||||||||||||||||||||||||||
| Balance at December 31, 2020 | 34,038,213 | 3,404 | 65,052,688 | 6,505 | 64,265,217 | 100,000 | (132 | ) | (94,020,294 | ) | (29,645,300 | ) | $ | 6,331,409 | ||||||||||||||||||||||||||
| Rounding | - | - | - | - | (2) | - | - | - | (2) | - | ||||||||||||||||||||||||||||||
| Common stock issuance for conversion of debt and accrued interest | - | - | 6,354,895 | 635 | 60,372 | - | - | - | 61,007 | - | ||||||||||||||||||||||||||||||
| Common stock issued at fair value for services | - | - | 4,766,280 | 477 | 338,643 | - | - | - | 339,120 | - | ||||||||||||||||||||||||||||||
| Common stock issued for conversion of Series J Preferred stock | - | - | 978,726 | 98 | 32,402 | - | - | - | 32,500 | (32,500 | ) | |||||||||||||||||||||||||||||
| Common stock issued for conversion of Series L Preferred stock | - | 9,988,447 | 999 | 300,260 | - | - | - | 301,259 | (301,259 | ) | ||||||||||||||||||||||||||||||
| Common stock issued for Series O Preferred stock dividends | - | - | 236,205 | 24 | (24 | ) | - | - | - | - | - | |||||||||||||||||||||||||||||
| Common stock issued for conversion of Series O Preferred stock | - | - | 12,844,190 | 1,284 | 468,216 | - | - | - | 469,500 | (469,500 | ) | |||||||||||||||||||||||||||||
| Common stock issued for conversion of Series P Preferred stock | - | - | 6,583,405 | 658 | 125,342 | - | - | - | 126,000 | (126,000 | ) | |||||||||||||||||||||||||||||
| Common stock issued for conversion of Series Q Preferred stock | - | - | 2,052,526 | 205 | 73,795 | - | - | - | 74,000 | (74,000 | ) | |||||||||||||||||||||||||||||
| Common stock issued for conversion of Series R Preferred stock | - | - | 2,891,618 | 289 | 98,211 | - | - | - | 98,500 | (98,500 | ) | |||||||||||||||||||||||||||||
| Common stock issued for conversion of Series S Preferred stock | - | - | 1,149,050 | 115 | 44,885 | - | - | - | 45,000 | (45,000 | ) | |||||||||||||||||||||||||||||
| Issuance of Series M Preferred stock through a private placement | - | - | - | - | - | - | - | - | - | 29,425 | ||||||||||||||||||||||||||||||
| Issuance of Series R Preferred stock through a private placement | - | - | - | - | - | - | - | - | - | 1,080,000 | ||||||||||||||||||||||||||||||
| Issuance of Series T Preferred stock in exchange for property | - | - | - | - | - | - | - | - | - | 630,000 | ||||||||||||||||||||||||||||||
| Exchange of Series G Preferred Stock for Series S Preferred stock | - | - | - | - | - | - | - | - | - | 210,000 | ||||||||||||||||||||||||||||||
| Exchange of Series I Preferred Stock for Series R Preferred stock | - | - | - | - | - | - | - | - | - | 72,400 | ||||||||||||||||||||||||||||||
| Exchange of Series K Preferred Stock for Series R Preferred stock | - | - | - | - | - | - | - | - | - | 483,767 | ||||||||||||||||||||||||||||||
| Exchange of Series M Preferred Stock for Series R Preferred stock | - | - | - | - | - | - | - | - | - | 40,000 | ||||||||||||||||||||||||||||||
| Loss on conversion of Preferred Stock | - | - | - | - | 790,812 | - | - | - | 790,812 | - | ||||||||||||||||||||||||||||||
| Issuance of common stock warrants deemed dividends | - | - | - | - | 2,037,849 | - | - | - | 2,037,849 | - | ||||||||||||||||||||||||||||||
| Net Income | - | - | - | - | - | - | - | (19,895,424 | ) | (19,895,424 | ) | - | ||||||||||||||||||||||||||||
| Balance at March 31, 2021 | 34,038,213 | $ | 3,404 | 112,898,030 | $ | 11,289 | $ | 68,635,978 | $ | 100,000 | $ | (132 | ) | $ | (113,915,718 | ) | $ | (45,165,179 | ) | $ | 7,730,242 | |||||||||||||||||||
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, 2021 AND 2020
(Unaudited)
| Three Months Ended | ||||||||
| March 31, 2021 | March 31, 2020 | |||||||
| CASH FLOWS FROM OPERATING ACTIVITIES: | ||||||||
| Net (Loss) Income | $ | (17,857,575 | ) | $ | 21,601,414 | |||
| Adjustment to reconcile net loss to net cash used in operating activities | ||||||||
| Depreciation and amortization | 11,631 | 11,361 | ||||||
| Common stock issued for services | 339,120 | 61,865 | ||||||
| Loss (Gain) on net change in valuation of derivative liability | 15,651,708 | (22,530,870 | ) | |||||
| Debt discount recognized as interest expense | 14,729 | - | ||||||
| Net unrealized loss (gain) on fair value of security | (45,200 | ) | 5,200 | |||||
| Loss on exchange of preferred stock | 40,000 | - | ||||||
| Loss (Gain) on conversion of preferred stock | 790,812 | (1,229 | ) | |||||
| Convertible note receivable | - | (4,000 | ) | |||||
| Change in Assets (Increase) Decrease in: | ||||||||
| Contracts receivable | (67,028 | ) | 195,577 | |||||
| Contract asset | 78,301 | (195,769 | ) | |||||
| Inventory asset | (1,900 | ) | - | |||||
| Prepaid expenses and other assets | 39,505 | 37,912 | ||||||
| Other receivable | (1,315 | ) | - | |||||
| Change in Liabilities Increase (Decrease) in: | ||||||||
| Accounts payable | 5,723 | 11,123 | ||||||
| Accrued expenses | 17,896 | 70,043 | ||||||
| Contract liabilities | (16,072 | ) | (195,565 | ) | ||||
| Customer deposit | - | 6,738 | ||||||
| NET CASH USED IN OPERATING ACTIVITIES | (999,665 | ) | (926,200 | ) | ||||
| CASH FLOWS USED FROM INVESTING ACTIVITIES: | ||||||||
| Purchase of fixed assets | (4,500 | ) | - | |||||
| CASH USED IN INVESTING ACTIVITIES | (4,500 | ) | - | |||||
| CASH FLOWS FROM FINANCING ACTIVITIES: | ||||||||
| Payments on capital lease | (2,272 | ) | (2,272 | ) | ||||
| Promissory note payable, related party | - | 5,000 | ||||||
| Loan payable financing, net | - | (60,637 | ) | |||||
| Loan payable, related party, net | (23,747 | ) | (21,882 | ) | ||||
| Net cumulative preferred stock dividends payable | 17,595 | 17,427 | ||||||
| Proceeds from convertible promissory notes | 60,000 | - | ||||||
| Payments on promissory notes | (14,800 | ) | - | |||||
| Net proceeds for issuance of preferred stock for cash - mezzanine | 1,109,425 | 795,250 | ||||||
| NET CASH PROVIDED BY FINANCING ACTIVITIES | 1,146,201 | 732,886 | ||||||
| NET INCREASE (DECREASE) IN CASH | 142,036 | (193,314 | ) | |||||
| CASH BEGINNING OF PERIOD | 416,121 | 490,614 | ||||||
| CASH END OF PERIOD | $ | 558,157 | $ | 297,300 | ||||
| SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION | ||||||||
| Interest paid | $ | 2,281 | $ | 7,086 | ||||
| Taxes paid | $ | - | $ | - | ||||
| SUPPLEMENTAL DISCLOSURES OF NON CASH TRANSACTIONS | ||||||||
| Common stock issued at fair value for conversion of debt, plus accrued interest, and other fees | $ | 61,007 | $ | 77,747 | ||||
| Issuance of Series T preferred shares in exchange for property | $ | 630,000 | $ | - | ||||
| Issuance of Series O dividends | $ | 24 | $ | - | ||||
| Preferred stock converted to common stock | $ | 1,146,759 | $ | - | ||||
| Fair value of derivative at issuance | $ | 54,652 | $ | - | ||||
| Exchange from mezzanine to liability | $ | 766,167 | $ | - | ||||
| Issuance of warrants deemed dividends | $ | 2,037,849 | $ | - | ||||
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, 2021
| 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, 2021 are not necessarily indicative of the results that may be expected for the year ending December 31, 2021. 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, 2020. |
We have taken initial steps in a new direction implementing Water On Demand as a potential revenue source. During the period ended March 31, 2021, the Company ventured into acquiring real estate assets to finance water projects. Ivan Anz, OriginClear advisor and founder of strategic partner Philanthroinvestors® Inc. invested certain real estate assets through an asset purchase agreement. Per the asset purchase agreement, in exchange for preferred stock and warrants, the Company received real property valued at $630,000. The real property has been listed actively on the market to be sold. It is our plan to convert the asset into cash through sale, but we may choose to accept debt financing to leverage cash from the real property. We intend to apply the proceeds received from the sale of the real property to finance water systems either in support of standard equipment sales by our subsidiary Progressive Water Treatment (“PWT”), or for the newer Water On Demand pre-funded water systems, or any combination thereof.
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, 2020 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 profitable operations and receiving additional cash infusions. During the three months ended March 31, 2021, 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 $796,178 and has standing purchase orders and open invoices with customers which will provide funds for operations. Management believes the existing shareholders, the prospective new investors and future sales will provide the additional cash needed to meet the Company’s obligations as they become due and will allow the development of its core business operations. No assurance can be given that any future financing will be available or, if available, that it will be on terms that are satisfactory to the Company. Even if the Company is able to obtain additional financing, it may contain 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.
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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 the Company believes 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. The Company’s diluted loss per share is the same as the basic loss per share for the three months ended March 31, 2021 and 2020, respectively, as the inclusion of any potential shares would have had an anti-dilutive effect due to the Company generating a loss.
| For the Three Months Ended March 31, | ||||||||
| 2021 | 2020 | |||||||
| (Loss) Income to common shareholders (Numerator) | $ | (19,895,424 | ) | $ | 21,601,414 | |||
| Basic weighted average number of common shares outstanding (Denominator) | 91,595,414 | 6,494,377 | ||||||
| Diluted weighted average number of common shares outstanding (Denominator) | 91,595,414 | 100,433,377 | ||||||
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, 2021 | ||||||||||||
| Warrant shares | 58,345,384 | - | ||||||||||
| Convertible debt shares | 414,033,974 | - | ||||||||||
| Preferred shares | 34,088,172 | - | ||||||||||
| March 31, 2020 | ||||||||||||
| Warrant shares | 122,044 | - | ||||||||||
| Convertible debt shares | 97,207,689 | 93,939,000 | ||||||||||
| Preferred shares | 40,073,167 | - | ||||||||||
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.
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Revenues and related costs on construction contracts are recognized as the performance obligations for work are satisfied over time in accordance with Accounting Standards Codification (“ASC”) 606, Revenue from Contracts with Customers. Under ASC 606, revenue and associated profit, will be recognized as the customer obtains control of the goods and services promised in the contract (i.e., performance obligations). All un-allocable indirect costs and corporate general and administrative costs are charged to the periods as incurred. However, in the event a loss on a contract is foreseen, the Company will recognize the loss as it is determined.
Revisions in cost and profit estimates during the course of the contract are reflected in the accounting period in which the facts for the revisions become known. Provisions for estimated losses on uncompleted contracts are made in the period in which such losses are determined. Changes in job performance, job conditions, and estimated profitability, including those arising from contract penalty provisions, and final contract settlements, may result in revisions to costs and income, which are recognized in the period the revisions are determined.
Contract receivables are recorded on contracts for amounts currently due based upon progress billings, as well as retention, which are collectible upon completion of the contracts. Accounts payable to material suppliers and subcontractors are recorded for amounts currently due based upon work completed or materials received, as are retention due subcontractors, which are payable upon completion of the contract. General and administrative expenses are charged to operations as incurred and are not allocated to contract costs.
Contract Receivable
The Company bills its customers in accordance with contractual agreements. The agreements generally require billing to be on a progressive basis as work is completed. Credit is extended based on evaluation of clients financial condition and collateral is not required. The Company maintains an allowance for doubtful accounts for estimated losses that may arise if any customer is unable to make required payments. Management performs a quantitative and qualitative review of the receivables past due from customers on a monthly basis. The Company records an allowance against uncollectible items for each customer after all reasonable means of collection have been exhausted, and the potential for recovery is considered remote. There was no allowance for doubtful accounts as of March 31, 2021 and December 31, 2020, respectively. The net contract receivable balance was $505,458 and $438,430 at March 31, 2021 and December 31, 2020, 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, 2021 and December 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 $0 and $28,982 for the three months ended March 31, 2021 and 2020, respectively.
Advertising Costs
The Company expenses the cost of advertising and promotional materials when incurred. The advertising costs were $53,822 and $31,298 for the three months ended March 31, 2021 and 2020, respectively.
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Property and Equipment
Property and equipment are stated at cost. Gain or loss is recognized upon disposal of property and equipment, and the asset and related accumulated depreciation are removed from the accounts. Expenditures for maintenance and repairs are charged to expense as incurred, while expenditures for addition and betterment are capitalized. Furniture and equipment are depreciated on the straight-line method and include the following categories:
| Estimated Life | ||||
| Machinery and equipment | 5-10 years | |||
| Furniture, fixtures and computer equipment | 5-7 years | |||
| Vehicles | 3-5 years | |||
| Leasehold improvements | 2-5 years |
Long-lived assets held and used by the Company are reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. In the event that facts and circumstances indicate that the cost of any long-lived assets may be impaired, an evaluation of recoverability would be performed following generally accepted accounting principles.
Depreciation expense during the three months ended March 31, 2021 and 2020, was $11,631 and $11,361, respectively.
Inventory
The Company expenses inventory on a first in, first out basis, and had raw materials of $1,900 and $0 as of March 31, 2021 and December 31, 2020, respectively.
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, 2021, 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.
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Fair value is defined as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. ASC Topic 820 established a three-tier fair value hierarchy which prioritizes the inputs used in measuring fair value. The hierarchy gives the highest priority to unadjusted quoted prices in active markets for identical assets or liabilities (level 1 measurements) and the lowest priority to unobservable inputs (level 3 measurements). These tiers include:
| ● | Level 1, defined as observable inputs such as quoted prices for identical instruments in active markets; | |
| ● | Level 2, defined as inputs other than quoted prices in active markets that are either directly or indirectly observable such as quoted prices for similar instruments in active markets or quoted prices for identical or similar instruments in markets that are not active; and | |
| ● | Level 3, defined as unobservable inputs in which little or no market data exists, therefore requiring an entity to develop its own assumptions, such as valuations derived from valuation techniques in which one or more significant inputs or significant value drivers are unobservable. |
The following table presents certain investments and liabilities of the Company’s financial assets measured and recorded at fair value on the Company’s balance sheets on a recurring basis and their level within the fair value hierarchy as of March 31, 2021.
| Total | (Level 1) | (Level 2) | (Level 3) | |||||||||||||
| Investment at fair value-securities | $ | 53,200 | $ | 53,200 | $ | - | $ | - | ||||||||
| Total Assets measured at fair value | $ | 53,200 | $ | 53,200 | $ | - | $ | - | ||||||||
| Total | (Level 1) | (Level 2) | (Level 3) | |||||||||||||
| Derivative Liability, March 31, 2021 | $ | 28,016,667 | $ | - | $ | - | $ | 28,016,667 | ||||||||
| Total liabilities measured at fair value | $ | 28,016,667 | $ | - | $ | - | $ | 28,016,667 | ||||||||
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, 2021 | $ | 12,310,307 | ||
| Fair value at issuance | 54,652 | |||
| Loss on conversion of debt and change in derivative liability | 15,651,708 | |||
| Balance as of March 31, 2021 | $ | 28,016,667 |
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:
| 3/31/2021 | |||
| Risk free interest rate | .07% - 2.43% | ||
| Stock volatility factor | 20.0% - 238.0% | ||
| 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 analyzed 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.
Recently Issued Accounting Pronouncements
In August 2017, FASB issued accounting standards update ASU-2017-12, “D” (Topic 815) – “Targeted Improvements to Accounting for Hedging Activities”, to require an entity to present the earnings effect of the hedging instrument in the same statement line item in which the earnings effect of the hedged item is reported. The amendments in this update are effective for fiscal years beginning after December 15, 2018, and interim periods within those fiscal years. For all other entities, the amendments are effective for fiscal years beginning after December 15, 2019, and interim periods with the fiscal years beginning after December 15, 2020. Early adoption is permitted in any interim period after issuance of the update. The Company has evaluated the impact of the adoption of ASU 2017-12 on the Company’s audited consolidated financial statements, which had no material impact.
In June 2018, FASB issued accounting standards update ASU 2018-07, (Topic 505) – “Shared-Based Payment Arrangements with Nonemployees”, which simplifies the accounting for share-based payments granted to nonemployees for goods and services. Under the ASU, most of the guidance on such payments to nonemployees will be aligned with the requirements for share-based payments granted to employees. Under the ASU 2018-07, the measurement of equity-classified nonemployee share-based payments will be fixed on the grant date, as defined in ASC 718, and will use the term nonemployee vesting period, rather than requisite service period. The amendments in this update are effective for fiscal years beginning after December 15, 2018, including interim periods within those fiscal years. For all other entities, the amendments are effective for fiscal years beginning after December 15, 2019, and interim periods within fiscal years beginning after December 15, 2020. Early adoption is permitted if financial statements have not yet been issued. The Company adopted ASU 2018-07 on the January 1, 2019. The adoption of the new standard did not have a material impact on the Company’s audited consolidated financial statements.
Management reviewed currently issued pronouncements and does not believe that any other recently issued, but not yet effective, accounting standards, if currently adopted, would have a material effect on the accompanying condensed financial statements.
| 3. | CAPITAL STOCK |
Preferred Stock
Series C
On March 14, 2017, the Board of Directors authorized the issuance of 1,000 shares of Series C preferred stock, to T. Riggs Eckelberry in exchange for his continued employment with the Company. The holder of Series C preferred stock is not entitled to receive dividends, is not entitled to any liquidation preference and shares of Series C preferred stock do not have any conversion rights. The Series C preferred stock entitles the holder to 51% of the total voting power of our stockholders. The purchase price of the Series C preferred stock was $0.0001 per share representing a total purchase price of $0.10 for 1,000 shares. As of March 31, 2021, there were 1,000 shares of Series C preferred stock outstanding held by Mr. Eckelberry.
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Series D-1
On April 13, 2018, the Company designated 50,000,000 shares of its authorized preferred stock as Series D-1 preferred stock. The shares of Series D-1 preferred stock are not entitled to dividends and do not have a liquidation preference. Each share of Series D-1 preferred stock is convertible into 0.0005 of one share 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, which amount may be increased to 9.99% at the holders discretion upon 61 days’ written notice. As of March 31, 2021, there were 32,500,000 shares of Series D-1 preferred stock issued and outstanding.
Series E
On August 14, 2018, the Company designated 4,000,000 shares of its authorized preferred stock as Series E preferred stock. The shares of Series E preferred stock are not entitled to dividends and do not have a liquidation preference. Each share of Series E preferred stock is convertible into 0.05 shares of common stock. The shares of Series E preferred stock do not have any voting rights. 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, which amount may be increased to 9.99% at the holder’s discretion upon 61 days’ written notice. As of March 31, 2021, there were 1,537,213 shares of Series E preferred stock issued and outstanding.
Series F
On August 14, 2018, the Company designated 6,000 shares as Series F preferred stock. The shares of Series F preferred stock have a liquidation preference equal to the stated value of $1,000 per share plus any accrued but unpaid dividends. 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 shares of Series F preferred stock do not have any voting rights. 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 preferred stock at a price equal to the stated value, plus any accrued but unpaid dividends. The Company was required to redeem all outstanding shares of Series F preferred stock on September 1, 2020. During the year ended December 31, 2020, the Company exchanged 1,278 shares of Series F preferred stock for 1,278 shares of Series Q preferred stock. On October 19, 2020, 125 shares of Series F preferred stock were exchanged for 125 shares of Series O preferred stock and 31 shares of Series P preferred stock. As of December 31, 2020, there were 275 shares of Series F preferred stock issued and outstanding. As of December 31, 2020, a holder of 100 of such outstanding shares of Series F preferred stock, agreed that the Company would have no obligation to redeem such holder’s shares of Series F preferred stock prior to September 1, 2022, and the Company agreed to pay such holder, in addition to any dividends payable on such holder’s Series F preferred stock, an annual fee of 4% of the stated value of such holder’s shares of Series F preferred stock. Excluding such 100 shares, as of March 31, 2021, the Company had 175 outstanding shares of Series F preferred stock which the Company was required to, and failed to redeem on September 1, 2020, and was in default for an aggregate redemption price (equal to the stated value) of $175,000.
Series G
On January 16, 2019, the Company designated 6,000 shares as Series G preferred stock, each share having a stated value of $1,000 per share and holders of Series G preferred stock are entitled to cumulative dividends at the annual rate of 8% of the stated value, payable quarterly. The Series G preferred stock does not have voting rights, except as required by law and is not convertible into common stock. 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. The Company was required to redeem such shares of Series G preferred stock on April 30, 2021, at a price equal to the stated value plus any accrued but unpaid dividends. Pursuant to certain subscription agreements entered into with purchasers of the Series G preferred stock, each purchaser received shares of the Company’s common stock equal to an amount of, for each share of Series G preferred stock purchased, five hundred dollars ($500) divided by the closing price on the date the Company receives the executed subscription documents and purchase price from such investor. During the year ended December 31, 2020, 100 shares of Series G preferred stock were exchanged for Series K preferred stock. During the three months ended March 31, 2021, 210 shares of Series G preferred stock were exchanged for 210 shares of Series S preferred stock. The shares were issued and exchanged within the terms of the agreement and no gain or loss was recognized. As of March 31, 2021, there were 220 shares of Series G preferred stock issued and outstanding.
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Series I
On April 3, 2019, the Company designated 4,000 shares of preferred stock as Series I. The Series I has a stated value of $1,000 per share. Series I holders are entitled to cumulative dividends at the annual rate of 8% of the stated value, payable quarterly within 60 days from the end of each fiscal quarter. The Series I are not entitled to any voting rights except as may be required by applicable law, and are not convertible into common stock. The Company will have the right to redeem the Series I at any time while the Series I are outstanding at a price equal to the stated value plus any accrued but unpaid dividends. The Company will be required to redeem the Series I two years following the date that is the later of the (i) final closing of the tranche (as designated in the applicable subscription agreement) or (ii) the expiration date of the tranche that such shares to be redeemed were a part of. The Company was required to redeem such shares of Series I between May 2, 2021 and June 10, 2021, at a price equal to the stated value plus any accrued but unpaid dividends. 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 three months ended March 31, 2021, 72 shares of Series I preferred stock were exchanged for 72 shares of Series R preferred stock. The shares were issued and exchanged within the terms of the agreement and no gain or loss was recognized. As of March 31, 2021, there were 725 shares of Series I preferred stock issued and outstanding.
Series J
On April 3, 2019, the Company designated 100,000 shares of preferred stock as Series J. The Series J has a stated value of $1,000 per share and holders are entitled to receive dividends on an as-converted basis with the Company’s common stock. The Series J preferred stock is convertible into shares of the Company’s common stock, on the terms and conditions set forth in the Series J COD, which includes certain Make-Good Shares for certain prior investors. During the three months ended March 31, 2021, the Company issued 978,726 shares of common stock upon the conversion of 32.5 shares of Series J preferred stock. For the period ended March 31, 2021, the Company recognized a loss on conversion of Series J preferred stock in the amount of $58,032. As of March 31, 2021, there were 240 shares of Series J preferred stock issued and outstanding.
Series K
On June 3, 2019, the Company designated 4,000 shares of preferred stock as Series K. The Series K has a stated value of $1,000 per share. Series K holders are entitled to cumulative dividends at the annual rate of 8% of the stated value, payable quarterly within 60 days from the end of each fiscal quarter. The Series K is not be entitled to any voting rights except as may be required by applicable law, and is not convertible into common stock. The Company will have the right to redeem the Series K at any time while the Series K are outstanding at a price equal to the stated value plus any accrued but unpaid dividends. The Company will be required to redeem the Series K two years following the date that is the later of the (i) final closing of the tranche (as designated in the applicable subscription agreement) or (ii) the expiration date of the tranche that such shares to be redeemed were a part of. The Company is required to redeem such shares of Series K between August 5, 2021 and April 24, 2022, at a price equal to the stated value plus any accrued but unpaid dividends. 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 three months ended March 31, 2021, 484 shares of Series K preferred stock were exchanged for 484 shares of Series R preferred stock. The shares were issued and exchanged within the terms of the agreement and no gain or loss was recognized. As of March 31, 2021, there were 2,677 shares of Series K preferred stock issued and outstanding.
Series L
On June 3, 2019, the Company designated 100,000 shares of preferred stock as Series L. The Series L has a stated value of $1,000 per share and holders are entitled to receive dividends on an as-converted basis with the Company’s common stock. The Series L preferred stock is convertible into shares of the Company’s common stock, on the terms and conditions set forth in the Series L COD, which includes certain Make-Good Shares for certain prior investors. During the three months ended March 31, 2021, the Company issued an aggregate of 9,988,447 shares of common stock upon conversion of 301 shares of Series L preferred stock. For the period ended March 31, 2021, the Company recognized a loss on conversion of Series L preferred stock in the amount of $442,063. As of March 31, 2021, there were 831 shares of Series L preferred stock issued and outstanding.
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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 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 is 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 year ended December 31, 2020, prior to the terms of the Series M preferred stock being amended, 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. The Company did not recognize a gain or loss since the shares were converted within the terms of the agreement. During the three months ended March 31, 2021, the Company issued an aggregate of 1,177 shares of Series M preferred stock for an aggregate purchase price of $29,425 and exchanged an aggregate of 3,200 shares of Series M preferred stock for 120 shares of Series R preferred stock. As of March 31, 2021, there were 40,340 shares of Series M preferred stock issued and outstanding. The Company recognized a loss on exchange of Series M preferred stock to Series R preferred stock in the amount of $40,000.
Series O
On April 27, 2020, the Company designated 2,000 shares of preferred stock as Series O preferred stock. The Series O preferred stock has a stated value of $1,000 per share, and entitles holders to receive cumulative dividends (i) in cash at an annual rate of 8% of the stated value, and (ii) in shares of common stock of the Company (valued based on the conversion price as in effect on the last trading day of the applicable fiscal quarter) at an annual rate of 4% of the stated value, payable quarterly within 60 days from the end of such fiscal quarter. The Series O 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 O preferred stock has no preemptive or subscription rights, and there is no sinking fund provision applicable to the Series O preferred stock. The Series O preferred stock does not have voting rights except as required by law. The Series O preferred stock is convertible into common stock of the Company in an amount determined by dividing 200% of the stated value of the Series O preferred stock being converted by the conversion price, provided that, the Series O may not be converted into common stock to the extent such conversion would result in the holder beneficially owning more than 4.99% of the Company’s outstanding common stock (which may be increased up to 9.99% upon 61 days’ written notice). The conversion price is equal to the average closing sale price of the common stock for the five trading days prior to the conversion date. The Company has the right (but no obligation) to redeem the Series O preferred stock at any time while the Series O preferred stock are outstanding at a redemption price equal to the stated value plus any accrued but unpaid dividends. The cumulative dividends are recorded as interest expense. During the three months ended March 31, 2021, the Company issued an aggregate of 12,844,190 shares of common stock upon conversion of 469.5 shares of Series O preferred stock and exchanged an aggregate of 120 shares of Series O preferred stock for 120 shares of Series R preferred stock. The shares were issued and exchanged within the terms of the agreement and no gain or loss was recognized. As of March 31, 2021, there were 1,406 shares of Series O preferred stock issued and outstanding, and the Company issued an aggregate of 236,205 shares of common stock in prorated 4% annualized dividends.
Series P
On April 27, 2020, the Company designated 500 shares of preferred stock as Series P preferred stock. The Series P preferred stock has a stated value of $1,000 per share, and entitles holders to receive dividends on an as-converted basis with the Company’s common stock. The Series P preferred stock is convertible into shares of the Company’s common stock, on the terms and conditions set forth in the Certificate of Designation of Series P preferred stock, which includes certain make-good shares for certain prior investors, and provided that, the Series P preferred stock may not be converted into common stock to the extent such conversion would result in the holder beneficially owning more than 4.99% of the Company’s outstanding common stock (which may be increased up to 9.99% upon 61 days’ written notice). The Series P preferred stock entitles the holders to a payment on an as-converted and pari passu basis with the common stock upon any liquidation. The Series P preferred stock has no preemptive or subscription rights, and there is no sinking fund or redemption provisions applicable to the Series P preferred stock. The Series P preferred stock votes on an as-converted basis with the common stock, subject to the beneficial ownership limitation. During the three months ended March 31, 2021, the Company issued an aggregate of 6,583,405 shares of common stock upon conversion of 126 shares of Series P preferred stock. For the period ended March 31, 2021, the Company recognized a loss on conversion of Series P preferred stock in the amount of $290,717. As of March 31, 2021, there were 231 shares of Series P preferred stock issued and outstanding.
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Series Q
On August 21, 2020, the Company designated 2,000 shares of preferred stock as Series Q preferred stock. The Series Q preferred stock has a stated value of $1,000 per share, and entitles holders to receive cumulative dividends in cash at an annual rate of 12% of the stated value, payable quarterly within 60 days from the end of such fiscal quarter. The Series Q 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 Q preferred stock has no preemptive or subscription rights, and there is no sinking fund provision applicable to the Series Q preferred stock. The Series Q preferred stock does not have voting rights except as required by law. The Series Q preferred stock is convertible into common stock of the Company in an amount determined by dividing 200% of the stated value of the Series Q preferred stock being converted by the conversion price, provided that, the Series Q may not be converted into common stock to the extent such conversion would result in the holder beneficially owning more than 4.99% of the Company’s outstanding common stock (which may be increased up to 9.99% upon 61 days’ written notice). The conversion price will be equal to the average closing sale price of the common stock for the five trading days prior to the conversion date. The Company will have the right (but no obligation) to redeem the Series Q preferred stock at any time while the Series Q preferred stock are outstanding at a redemption price equal to the stated value plus any accrued but unpaid dividends. The cumulative dividends are recorded as interest expense. During the three months ended March 31, 2021, the Company issued an aggregate of 2,052,526 shares of common stock upon conversion of 74 shares of Series Q preferred stock. The shares were issued and exchanged within the terms of the agreement and no gain or loss was recognized. As of March 31, 2021, there were 951 shares of Series Q preferred stock issued and outstanding.
Series R
On November 16, 2020, the Company designated 5,000 shares of preferred stock as Series R preferred stock. The Series R has a stated value of $1,000 per share, and entitles holders to receive cumulative dividends in cash at an annual rate of 10% of the stated value, payable quarterly within 60 days from the end of such fiscal quarter. The Series R preferred stock holders are not entitled to any voting rights except as may be required by applicable law. The Series R preferred stock is convertible into common stock of the Company in an amount determined by dividing 200% of the stated value of the Series R being converted by the conversion price; certain prior investors will also be entitled to certain make-good shares; provided that, the Series R may not be converted into common stock to the extent such conversion would result in the holder beneficially owning more than 4.99% of the Company’s outstanding common stock (which may be increased up to 9.99% upon 61 days’ written notice). The conversion price will be equal to the average closing sale price of the common stock for the five trading days prior to the conversion date. The Company will have the right (but no obligation) to redeem the Series R at any time while the Series R are outstanding at a redemption price equal to, if paid in cash, the stated value plus any accrued but unpaid cash dividends, or, if paid in shares of common stock, in an amount of shares determined by dividing the stated value being redeemed by the conversion price. The subscribers were offered warrants with the purchase of Series R. During the three months ended March 31, 2021, the Company issued an aggregate of 1,080 shares of Series R preferred stock for an aggregate purchase price of $1,080,000 and exchanged an aggregate of 72 shares of Series I preferred stock, 484 shares of Series K preferred stock, 3,200 shares of Series M preferred stock, and 120 shares of Series O preferred stock for an aggregate of 796 shares of Series R preferred stock, and issued an aggregate of 2,891,619 shares of common stock upon conversion of 98.5 shares of Series R preferred stock. The shares were issued and exchanged within the terms of the agreement and no gain or loss was recognized. As of March 31, 2021, there were 2,268 shares of Series R preferred stock along with 47,323,340 A warrants and 10,900,000 B warrants issued and outstanding with a fair value of $2,477,366. The warrants were valued using the Black Scholes model (see additional information under warrants footnote).
Series S
On February 5, 2021, the Company designated 430 shares of preferred stock as Series S. The Series S has a stated value of $1,000 per share, and entitles holders to receive cumulative dividends in cash at an annual rate of 12% of the stated value, payable quarterly within 60 days from the end of such fiscal quarter. The Series S holders are not entitled to any voting rights except as may be required by applicable law. The Series S is convertible into common stock of the Company in an amount determined by dividing 200% of the stated value of the Series S being converted by the conversion price, provided that, the Series S may not be converted into common stock to the extent such conversion would result in the holder beneficially owning more than 4.99% of the Company’s outstanding common stock (which may be increased up to 9.99% upon 61 days’ written notice). The conversion price will be equal to the average closing sale price of the common stock for the five trading days prior to the conversion date. The Company will have the right (but no obligation) to redeem the Series S at any time while the Series S are outstanding at a redemption price equal to the stated value plus any accrued but unpaid dividends. During the three months ended March 31, 2021, the Company issued an aggregate 210 shares of Series S preferred stock in exchange for an aggregate of 210 Series G preferred stock and issued an aggregate of 1,149,050 shares of common stock upon conversion of 45 shares of Series S preferred stock. The shares were issued and exchanged within the terms of the agreement and no gain or loss was recognized. As of March 31, 2021, there were 165 shares of Series S preferred stock issued and outstanding.
Series T
On February 24, 2021, the Company designated 630 shares of preferred stock as Series T. The Series T has a stated value of $1,000 per share, and entitles holders to receive cumulative dividends in cash at an annual rate of 10% of the stated value, payable monthly. The Series T holders are not entitled to any voting rights except as may be required by applicable law. The Series T is convertible into common stock of the Company pursuant to the Series T COD, provided that, the Series T may not be converted into common stock to the extent such conversion would result in the holder beneficially owning more than 4.99% of the Company’s outstanding common stock (which may be increased up to 9.99% upon 61 days’ written notice). The Company will have the right (but no obligation) to redeem the Series T at any time while the Series T are outstanding at a redemption price equal to the stated value plus any accrued but unpaid dividends. On March 1, 2021, the Company issued an aggregate of 630 shares of Series T Preferred Stock to Ivan Anz (the “Purchaser’’) per terms of a Securities Purchase Agreement (the “SPA”). Per the SPA, the Company agreed to sell to Purchaser, and Purchaser agreed to purchase from the Company, 630 shares of the Company's Series T, and two-year cashless warrants to acquire 25,200,000 shares of the Company's common stock, valued at $0.05 per share per terms of the SPA, which may be exercised at any time in whole or in part. Per the SPA, the Series T, including any convertible shares acquired pursuant to exercise of the warrants, the Company shall pay 10% annual dividends in cash, paid monthly. Purchaser may convert any portion of the Series T, including convertible shares acquired pursuant to exercise of the warrants, at any time into shares of the Company's common stock at an agreed upon conversion rate per terms of the SPA. The purchaser and the Company agreed that in lieu of the purchase price for the Series T, the Purchaser transferred to the Company real property, with an aggregate value agreed to be $630,000 based on an appraisal from an international independent company. The real property consists of residential real estate in Buenos Aires Argentina valued at $580,000, and eight undeveloped lots valued at $50,000 in Terralta private neighborhood development.
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As of March 31, 2021, the real property exchanged for 630 shares of Series T was recorded at $630,000 and reflected on the balance sheet as long term asset for sale. The fair value of the warrants associated with acquiring 25,200,000 preferred shares were valued at $2,037,849, using the Black Scholes model and accounted for as deemed dividends and reflected in stockholder’s equity as accumulated paid in capital.
As of March 31, 2021, the Company accrued aggregate dividends in the amount of $273,869 for all series of preferred stock.
The Series J, Series L, Series M, Series O, Series P, Series Q, Series R, Series S and Series T preferred stock are accounted for outside of permanent equity due to the terms of conversion at a market component or stated value of the preferred stock.
Common Stock
The Company has 16,000,000,000 authorized shares of common stock with a par value of $0.0001.
Three months ended March 31, 2021
The Company issued 6,354,895 shares of common stock for the settlement of convertible promissory notes in an aggregate principal amount of $37,500, plus interest in the amount of $23,507, at a conversion price of $0.00955.
The Company issued 4,766,280 shares of common stock for services at fair value of $339,120, at share prices ranging from $0.0351 - $0.124.
The Company issued 236,205 shares of common stock for preferred stock dividends payable.
The Company issued 36,487,963 shares of common stock upon conversion of 1,251 shares of preferred stock.
Three months ended 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, at share prices ranging from $0.07 - $0.13.
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.
| 4. | RESTRICTED STOCK AND WARRANTS |
Restricted Stock to CEO
Between May 12, 2016, and March 1, 2021, 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. The RSGAs provides for the issuance of up to an aggregate of 202,109,214 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 101,054,607 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 101,054,607 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 or if alternate vesting is qualified and selected, the shares shall become eligible for vesting and issuance.
15
Restricted Stock to Employees, Board and Consultants
Between May 12, 2016, and March 1, 2021, the Company entered into Restricted Stock Grant Agreements (“the E, B &C RSGAs”) with its employees, the Board 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, B &C RSGAs are performance based shares. The E, B &C RSGAs provide for the issuance of up to 195,506,929 shares of the Company’s common stock to employees, Board 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 97,753,465 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 97,753,465 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 or if alternate vesting is qualified and selected, 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.
During the three months ended March 31, 2021, per electing and qualifying for the Restricted Stock Grant Agreement alternate vesting schedule, the Company issued to Mr. T. Riggs Eckelberry, one employee and one consultant an aggregate of 2,003,875 shares of the Company’s common stock with a value of $142,398, calculated using the closing share prices on the dates of the vesting agreements.
Warrants
During the three months ended March 31, 2021, the Company issued warrants to purchase 42,423,340 shares of common stock, associated with the Series R preferred stock. A summary of the Company’s warrant activity and related information follows for the three months ended March 31, 2021.
| 2021 | ||||||||
| Weighted | ||||||||
| average | ||||||||
| Number of | exercise | |||||||
| Warrants | price | |||||||
| Outstanding - beginning of year | 15,922,044 | $ | 4.24 | |||||
| Granted | 42,423,340 | $ | 0.06 | |||||
| Exercised | - | - | ||||||
| Forfeited | - | - | ||||||
| Outstanding - end of year | 58,345,384 | $ | 1.11 | |||||
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At March 31, 2021 and 2020, the weighted average remaining contractual life of warrants outstanding was as follows:
| 2021 | ||||||||||||||
| Weighted Average | ||||||||||||||
| Remaining | ||||||||||||||
| Exercise | Warrants | Warrants | Contractual | |||||||||||
| Prices | Outstanding | Exercisable | Life (years) | |||||||||||
| $ | 0.05 | 47,323,340 | 47,323,340 | 0.13 - 1.0 | ||||||||||
| $ | 0.10 | 10,900,000 | 10,900,000 | 0.64 - 0.94 | ||||||||||
| $ | 500.00 | 122,044 | 122,044 | 0.37 | ||||||||||
| 58,345,384 | 58,345,384 | |||||||||||||
At March 31, 2021, the aggregate intrinsic value of the warrants outstanding was $1,115,026.
| 5. | CONVERTIBLE PROMISSORY NOTES |
As of March 31, 2021, the outstanding convertible promissory notes are summarized as follows:
| Convertible Promissory Notes, net of discount | $ | 3,068,679 | ||
| Less current portion | 2,136,004 | |||
| Total long-term liabilities | $ | 932,275 |
Maturities of long-term debt for the next three years are as follows:
| Year Ending March 31, | Amount | |||
| 2022 | 2,193,858 | |||
| 2023 | 870,000 | |||
| 2024 | 62,275 | |||
| $ | 3,126,133 | |||
At March 31, 2021, the Company had $3,126133 in convertible promissory notes and has a remaining debt discount $57,854, leaving a net balance of $3,068,679.
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 year. 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 three months ended March 31, 2021, the Company issued 6,354,894 shares of common stock, upon conversion of $37,500 in principal, plus accrued interest of $23,507. As of March 31, 2021, the 2014-2015 Notes had an aggregate remaining balance of $973,650, of which $90,000 is long term.
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. As of March 31, 2021, the remaining balance was $62,275, which is long term.
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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 year. 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. As of March 31, 2021, the remaining balance of the 2015-2016 Notes was $780,000, which is long term.
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, 2021, the remaining balance on the Dec 2015 Note was $167,048, which is short term.
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, 2021, the remaining balance on the Sep 2016 Note was $430,896, which is short term.
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 had maturity dates of April 2, 2019 and May 31, 2019, respectively. The Apr & May 2018 Notes bear interest at 10% per year. 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 not 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. As of March 31, 2021, the remaining balance on the May 2018 Note was $218,064, which is short term.
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The Company entered into an unsecured convertible promissory note (the “Nov 20 Note”), on November 19, 2020 in the amount of $50,000. The Company received funds in the amount of $50,000. The Nov 20 Note matures on November 19, 2021, twelve months from the effective date of the Note. The Note may be extended sixty (60) months from the maturity date. The Nov 20 Note bears interest at 10% per year. The Nov 20 Note may be converted into shares of the Company’s common stock at a lesser price of $0.05 per share or (b) fifty percent (50%) of the lowest trade price of common stock recorded on any trade after the effective date, or (c) the lowest effective price per share granted. In addition, for each conversion, in event that shares are not delivered by the fourth business day (inclusive of the day of conversion), a penalty of $2,000 per day shall be assessed for each day after the third business day until the shares are delivered. The conversion feature of the Nov 20 Note was considered a derivative in accordance with current accounting guidelines because of the reset conversion features of the Note. The Company recorded amortization of debt discount, which was recognized as interest expense in the amount of $4,996 during the three months ended March 31, 2021. During the three months ended March 31, 2021, the Company paid off $14,800 in cash, of the Nov 20 Note. As of March 31, 2021, the remaining balance of the Nov 20 Note was $14,200, which is short term.
The Company entered into an unsecured convertible promissory note (the “Jan 21 Note”), on January 25, 2021 in the amount of $60,000. The Company received funds in the amount of $60,000. The Jan 21 Note matures on January 25, 2022, twelve months from the effective date of the Note. The Note may be extended sixty (60) months from the maturity date. The Jan 21 Note bears interest at 10% per year. The Jan 21 Note may be converted into shares of the Company’s common stock at a conversion price equal to the lower of (a) $0.05 per share, (b) fifty percent (50%) of the lowest trade price of common stock recorded on any trade after the effective date, or (c) the lowest effective price per share granted. In addition, for each conversion, in event that shares are not delivered by the fourth business day (inclusive of the day of conversion), a penalty of $2,000 per day shall be assessed for each day after the third business day until the shares are delivered. The conversion feature of the Jan 25 Note was considered a derivative in accordance with current accounting guidelines because of the reset conversion features of the Note. The Company recorded amortization of debt discount, which was recognized as interest expense in the amount of $9,732 during the three months ended March 31, 2021. As of March 31, 2021, the balance of the Jan 21 Note was $60,000, which is short term.
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, 2021 was $28,016,667.
| 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.
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The following table represents a disaggregation of revenue by type of good or service from contracts with customers for the three months ended March 31, 2021 and 2020.
| Three Months Ended | ||||||||
| March 31, | ||||||||
| 2021 | 2020 | |||||||
| Equipment Contracts | $ | 502,441 | $ | 763,157 | ||||
| Component Sales | 265,135 | 318,074 | ||||||
| Services Sales | 20,488 | 11,207 | ||||||
| Rental Income | 8,114 | - | ||||||
| $ | 796,178 | $ | 1,092,438 | |||||
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, 2021 and for the year ended December 31, 2020, was $70,433 and $148,734, respectively. The contract liability for the three months ended March 31, 2021 and for the year ended December 31, 2020, was $324,479 and $340,551, respectively.
| 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, 2021, the note included principal of $80,000 plus accrued interest of $16,000 for a total of $133,879. The Note was considered impaired as of March 31, 2021, and an allowance was recognized in the financials in the amount of $133,879, during the year ended December 31, 2020, due to impairment.
Fair value investment in Securities
On May 15, 2018, the Company received 4,000 shares of WTII Series C convertible preferred stock for the use of OriginClear, Inc. technology associated with their proprietary electro water separation system. Each share of Series C convertible preferred stock is convertible into 1,000 shares of WTII common stock. The stock was valued at fair market value of $0.0075 for a price of $30,000 on the date of issuance. The Company analyzed 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, 2021, the fair value of the preferred shares was $53,200.
| 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 amortized over the terms of the loans, which have various maturity dates ranging from October 2018 through February 2019. As of December 31, 2019, the finance cost was fully amortized. The term of the loans ranged from two months to six months. The net balance as of March 31, 2021 and December 31, 2020 was $342,896 and $342,896, respectively.
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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. During the period ended March 31, 2021, the CEO loaned the Company $50,000, and the Company made principal payments in the amount of $64,017, and recorded interest of $3,651, leaving a balance of $71,136 as of March 31, 2021.
Paycheck Protection Program Loan
Between May 4, 2020 and May 5, 2020, the Company received loan proceeds in the aggregate amount of $505,000 (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 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 used the proceeds of the PPP Loan specifically for eligible purposes and will pursue forgiveness, although no assurance is provided that forgiveness for all or any portion of the PPP Loan will be obtained.
| 9. | CAPITAL LEASES |
The Company entered into a capital lease for the purchase of equipment during the year ended December 31, 2019. 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, 2021, the maturities are summarized as follows:
| Capital lease | $ | 14,801 | ||
| Less current portion | 9,088 | |||
| Total long-term liabilities | $ | 5,713 |
| 10. | FOREIGN SUBSIDIARY |
On December 31, 2014, the Company formed a wholly owned subsidiary, OriginClear Technologies Limited (OTG), in Hong Kong, China. The Company granted OTG a master license for the People’s Republic of China. In turn, OTG is expected to license regional joint ventures for water treatment.
| 11. | COMMITMENTS AND CONTINGENCIES |
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 $7,000 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 three months ended March 31, 2021.
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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 law counts for sums due for services allegedly performed, and fraud. The Complaint was filed by RDI Financial, LLC (“RDI”), an alleged assignee of Interdependence, Inc., and named the Company and its 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 claimed to be entitled to enforce the contract as the assignee, and demanded monetary damages in the aggregate amount of $630,000. 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, and with the absence of prior notice or service of the suit, an improper default promptly challenged. In October 2019, the Court vacated the default and judgment, and granted the Company and WaterChain leave to file an Answer and Cross-Complaint against RDI and Interdependence. Through these filings, the Company and WaterChain, Inc. contested the allegations and claims in the Complaint, denied that Interdependence performed the required services, and contended that the Company overpaid Interdependence $40,000 for whatever limited work was done. More specifically, in November 2019, an Answer was filed by the Company and WaterChain 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. The Company alleged that Interdependence misrepresented the nature and scope of the services which were to be provided and its ability to provide them, falsely promised and promoted the results it would obtain for the Company and WaterChain in providing such services, and also failed to provide the Company with the services as required by the contract such that Interdependence was overpaid based on what limited work it in fact did. For those reasons, and prior to any litigation, the Company terminated the contract for non-performance. Following discovery and pleading activity, the Company and WaterChain entered into settlement negotiations with RDI to resolve this matter on a defense cost basis. The parties reached an amicable resolution and entered into a Settlement Agreement and Mutual and General Release on December 16, 2020 which provided for a less than defense cost resolution through a payment of $20,000 and stock transfers on a monthly basis through December 2021, with removal of restrictive legends occurring at six month intervals following each transfer. Notice of Settlement of Entire Case was filed with the Court in January 2021, and all Court dates vacated. Once the stock transfers and restriction removals are completed, the action will be dismissed with prejudice. All parties are fully and timely performing under the Settlement Agreement, and no further issues or proceedings, or fees and costs, are anticipated.
On January 12, 2021, OriginClear, Inc. Progressive Water Treatment, Inc. and T. Riggs Eckelberry, individually (collectively, the “iKAHN Plaintiffs”), filed a complaint in the Supreme Court for the State of New York in the County of Ontario against iKAHN Capital LLC (“iKAHN”). The case stems from the purported “Agreement for the Purchase and Sale of Future Receipts” that OriginClear and iKAHN Capital entered into on September 7, 2018 (the “iKAHN Agreement”). The iKAHN Plaintiffs alleged that the iKAHN Agreement is, in fact, a loan that violates New York’s usury laws, and requested that the Court declare the iKAHN Agreement void and unenforceable; vacatur of the judgment entered against the iKAHN Plaintiffs on November 6, 2018 in the amount of $30,205; an award of attorneys’ fees and costs, and court costs and fees; and any and all other relief the iKAHN Plaintiffs may be entitled to. On April 22, 2021, the iKAHN Plaintiffs and iKAHN settled the dispute on the following terms: (i) vacatur of the judgment obtained by iKAHN against the iKAHN Plaintiffs; (ii) release of any and all bank levies, liens, security interests, powers of attorney, and other encumbrances iKAHN may have against the iKAHN Plaintiffs; and (iii) dismissal of the action filed by the iKAHN Plaintiffs against iKAHN with prejudice. Accordingly, the iKAHN Plaintiffs no longer owe any further amounts to iKAHN with respect to the iKAHN Agreement.
On November 16, 2020, Progressive Water Treatment, Inc., OriginClear, Inc. and T. Riggs Eckelberry, individually (collectively, the “Yellowstone Plaintiffs”), filed a complaint in the Supreme Court for the State of New York in and for the County of Erie against Yellowstone Capital, LLC (“Yellowstone”). The case stems from the purported “Secured Merchant Agreement” that OriginClear and Yellowstone entered into on July 19, 2018 (the “Yellowstone Agreement”). The Yellowstone Plaintiffs alleged that the Yellowstone Agreement is, in fact, a loan that violates New York’s usury laws, and requested that the Court declare, and requested that the Court declare the Yellowstone Agreement void and unenforceable; vacatur of the judgment entered against the judgment that was entered against the Yellowstone Plaintiffs on November 7, 2018 in the amount of $99,303; an award of attorneys’ fees and costs, and court costs and fees; and all other relief to which the Yellowstone Plaintiffs may be entitled. On December 4, 2020, Yellowstone filed a Motion to Dismiss the Yellowstone Plaintiffs’ Complaint. On January 5, 2021, Yellowstone’s Motion to Dismiss was granted. On January 5, 2021, the Yellowstone Plaintiffs appealed the trial court’s decision & order granting Yellowstone’s Motion to Dismiss to the New York Supreme Court Appellate Division, Fourth Department. On May 11, 2021, the Yellowstone Plaintiffs filed their opening memorandum of law in support of appeal. On May 24, 2021, Yellowstone filed a letter requesting an extension of its time to respond. The appellate court granted Yellowstone’s request and extended its time to respond to July 12, 2021. On June 25, 2021, Yellowstone filed a second letter requesting an extension of its time to respond. The appellate court granted Yellowstone’s request and extended its time to respond to August 11, 2021.
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On October 12, 2020, OriginClear, Inc. Progressive Water Treatment, Inc. and T. Riggs Eckelberry, individually (collectively, the “GTR Plaintiffs”), filed a complaint in the Supreme Court for the State of New York in and for the County of Ontario against GTR Source LLC (“GTR”). The case stems from the purported Merchant Agreements that OriginClear and GTR entered into on July 20, 2018 and August 28, 2018 (together, the “GTR Agreements”). The GTR Plaintiffs allege that the GTR Agreements are, in fact, loans, and not merchant cash advances, and are in violation of New York’s usury laws, and requesting that the Court declare the GTR Agreements void and unenforceable; that the Judgment that was entered against the GTR Plaintiffs on March 20, 2019 in the amount of $143,083 be vacated; that the Settlement Agreement entered into by and between OriginClear and GTR, dated December 13, 2018, be declared void and unenforceable; restitution in the amount of $149,751; attorneys’ fees and costs; court costs and fees; and all other relief to which the GTR Plaintiffs may be entitled. On October 16, 2020, the GTR Plaintiffs filed an Order to Show Cause seeking a Temporary Restraining Order and Preliminary Injunction. On October 23, 2020, the Court granted the GTR Plaintiffs’ request for a Temporary Restraining Order, which remains in effect as of the date hereof. On November 25, 2020, the GTR Plaintiffs filed an amended complaint, which included 1 defendant, Tzvi “Steve” Reich, the President and Manager of GTR (together with GTR, the “GTR Defendants”), and 2 new causes of action: violation of the Racketeer Influenced and Corrupt Organizations Act, 18 U.S.C. § 1962(c), and Conspiracy, 18 U.S.C. § 1962(d) (the “Amended Complaint”). On December 1, 2020, the GTR Defendants removed the case to the United States District Court for the Western District of New York. On March 12, 2021, the GTR Defendants filed a Motion to Dismiss the Amended Complaint. As of the date hereof, the Motion to Dismiss has been fully briefed by the parties to the action; however, the United States District Court for the Western District of New York has not yet scheduled oral argument or issued a decision on the GTR Defendants’ motion.
On September 21, 2020, OriginClear, Inc. Progressive Water Treatment, Inc. and T. Riggs Eckelberry, individually (collectively, the “C6 Plaintiffs”), filed a complaint in the Supreme Court for the State of New York in and for the County of Boome against C6 Capital LLC (“C6 Capital”). The case stems from the purported “Purchase Agreement for the Sale of Receipts” that OriginClear and C6 Capital entered into on July 17, 2018 (the “C6 Agreement”). The C6 Plaintiffs are alleging that the C6 Agreement is, in fact, a loan, and not a merchant cash advance, and is in violation of New York’s usury laws, and requesting that the Court declare the C6 Agreement void and unenforceable; that the Judgment that was entered against the C6 Plaintiffs on November 7, 2018 in the amount of $64,337 be vacated; attorneys’ fees and costs; court costs and fees; and all other relief to which the C6 Plaintiffs may be entitled. On March 12, 2021, the C6 Plaintiffs and C6 Capital agreed to settle the dispute on the following terms: (i) vacatur of the judgment obtained by C6 Capital against the C6 Plaintiffs; (ii) release of any and all bank levies, liens, security interests, powers of attorney, and other encumbrances C6 Capital may have against the C6 Plaintiffs; and (iii) dismissal of the action filed by the C6 Plaintiffs against C6 Capital with prejudice. Accordingly, the C6 Plaintiffs no longer owe any further amounts to C6 Capital with respect to the C6 Agreement. Furthermore, the sister-state judgment C6 Capital obtained against the C6 Plaintiffs in California is currently in the process of being vacated by stipulation.
On September 18, 2019, Expansion Capital Group, LLC (“Expansion”) filed a complaint against Progressive Water Treatment, Inc., T. Riggs Eckelberry, individually, and Marc Stevens, individually (collectively, the “Expansion Defendants”) in the District Court for the 429th Judicial District, Collin County, Texas alleging breach of a Business Loan Agreement (the “Business Loan”), dated July 9, 2018, under which Expansion loaned $300,000 to Progressive Water Treatment, Inc., with an expectation of being repaid $408,000. On December 30, 2019, Expansion and the Expansion Defendants entered into a Settlement Agreement (the “Expansion Settlement”), pursuant to which the Expansion Defendants agreed to pay Expansion $252,000 in $10,500 monthly installments over a 24-month period. On December 9, 2020, the Expansion Defendants filed an against Expansion in the District Court for the 429th Judicial District, Collin County, Texas alleging that the Business Loan and Expansion Settlement constitute a usurious loan, in violation of Texas law (the “Expansion Action”). As of the date hereof, counsel for Expansion and the Expansion Defendants are currently engaged in settlement negotiations concerning the Expansion Action.
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On February 12, 2019, Auctus Fund, LLC (“Auctus”) filed a complaint against OriginClear in the United States District Court for the District of Massachusetts for numerous claims arising from two convertible promissory notes and accompanying securities purchase agreements. On March 13, 2019, Auctus and OriginClear entered into a Settlement Agreement and Mutual General Release, under which Auctus would be permitted to convert $570,000 into OriginClear securities pursuant to the terms set forth in the convertible promissory notes. On February 2, 2021, OriginClear filed a Motion to Set Aside the Settlement Agreement as Void under Section 29(b) of the Securities Exchange Act of 1934 (the “Act”) for Auctus’ violation of Section 15(a) of the Act. If granted, the Settlement Agreement would be declared void and unenforceable. As of the date hereof, the Motion to Set Aside the Settlement Agreement has been fully briefed by the parties to the action; however, the United States District Court for the District of Massachusetts has not yet scheduled oral argument or issued a decision on OriginClear’s motion.
| 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 1, 2021 and June 14, 2021, the Company entered into subscription agreements with certain accredited investors pursuant to which the Company sold an aggregate of 1,376 shares of the Company’s Series R preferred stock for an aggregate purchase price of $1,375,750. The Company also issued an aggregate of 27,515,000 Series A warrants and 4,375,000 Series B warrants to the investors.
Between April 6, 2021 and July 30, 2021, the Company issued to consultants and one employee an aggregate of 11,435,515 shares of the Company’s common stock for services including an aggregate of 531,633 shares of common stock for settlement of prior consulting agreement.
Between April 20, 2021 and May 26, 2021, holders of Series J preferred stock converted an aggregate of 15 Series J shares into an aggregate of 225,198 shares, including make-good shares, of the Company’s common stock.
Between April 6, 2021 and May 24, 2021, holders of Series L preferred stock converted an aggregate of 172 Series L shares into an aggregate of 5,277,307 shares, including make-good shares, of the Company’s common stock.
Between April 1, 2021 and May 26, 2021, holders of Series O preferred stock converted an aggregate of 571 Series O shares into an aggregate of 13,797,188 shares of the Company’s common stock.
Between April 1, 2021 and May 26, 2021, holders of Series P preferred stock converted an aggregate of 149 Series P shares into an aggregate of 2,056,421 shares, including make-good shares, of the Company’s common stock.
Between April 20, 2021 and July 22, 2021, holders of Series Q preferred stock converted an aggregate of 336 Series Q shares into an aggregate of 8,258,220 shares of the Company’s common stock.
Between April 1, 2021 and July 22, 2021, holders of Series R preferred stock converted an aggregate of 826 Series R shares into an aggregate of 23,806,269 shares, including make-good shares, of the Company’s common stock.
Between April 20, 2021 and July 22, 2021, holders of Series S preferred stock converted an aggregate of 90 Series S shares into an aggregate of 2,196,324 shares of the Company’s common stock.
On July 20, 2021, holders of Series U preferred stock converted an aggregate of 100 Series U shares into an aggregate of 1,888,694 shares of the Company’s common stock
Between July 20, 2021 and July 22, 2021, holders of Series W preferred stock converted an aggregate of 175 Series W shares into an aggregate of 4,463,400 shares of the Company’s common stock
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Between April 14, 2021 and June 23, 2021, the Company entered into exchange agreements with holders of the Company’s Series G preferred stock pursuant to which such holders exchanged an aggregate of 155 shares of Series G preferred stock for 155 shares of the Company’s Series S preferred stock.
Between April 5, 2021 and June 15, 2021, the Company issued an aggregate of 1,598 shares of the Company’s Series R preferred stock in exchange for an aggregate of 15 shares of Series G preferred stock, an aggregate of 245 shares of Series I preferred stock and an aggregate of 1,338 Series K preferred stock.
On May 24, 2021, the Company issued an aggregate of 15 shares of the Company’s Series Q preferred stock in exchange for an aggregate of 15 shares of Series F preferred stock.
Between May 21, 2021 and July 21, 2021, the Company issued an aggregate of 608 shares of the Company’s Series W preferred stock in exchange for an aggregate of 245 shares of Series I preferred stock and an aggregate of 363 shares of Series K preferred stock.
On April 15, 2021, the Company issued an aggregate of 68,571 shares of the Company’s common stock in exchange for Series D-1 preferred stock.
On April 30, 2021, the Company was required to redeem 185 outstanding shares of Series G preferred stock but did not do so. As of the date of this filing, there are 50 shares of Series G preferred stock outstanding.
Between May 2, 2021 and June 10, 2021, the Company was required to redeem 285 outstanding shares of Series I preferred stock but did not do so. As of the date of this filing, there are 235 shares of Series I preferred stock outstanding.
On June 14, 2021, holders of convertible promissory notes converted an aggregate principal and interest amount of $72,698 into an aggregate of 7,572,727 shares of the Company’s common stock.
On June 30, 2021, the Company issued an aggregate of 98,652 shares of the Company’s common stock as dividends to certain holders of Series O preferred stock.
On April 28, 2021, the Company filed a certificate of designation (the “Series W COD”) of Series W preferred stock (the “Series W”) with the Secretary of State of Nevada. Pursuant to the Series W COD, the Company designated 3,390 shares of preferred stock as Series W. The Series W has a stated value of $1,000 per share, and will be entitled to cumulative dividends in cash at an annual rate of 12% of the stated value, payable quarterly. The Series W will not be entitled to any voting rights except as may be required by applicable law. The Series W will be convertible into common stock of the Company in an amount determined by dividing 200% of the stated value of the Series W being converted by the conversion price; provided that, the Series W may not be converted into common stock to the extent such conversion would result in the holder beneficially owning more than 4.99% of the Company’s outstanding common stock (which may be increased up to 9.99% upon 61 days’ written notice). The conversion price will be equal to the average closing sale price of the common stock for the five trading days prior to the conversion date. The Company will have the right (but no obligation) to redeem the Series W at any time at a redemption price equal to the stated value plus any accrued but unpaid dividends.
On May 26, 2021, the Company designated 5,000 shares of preferred stock as Series U. The Series U has a stated value of $1,000 per share. The Series U holders are not entitled to any dividends and will not have any voting rights except as may be required by applicable law. The Series U is convertible into common stock of the Company in an amount determined by dividing 150% of the stated value of the Series U being converted by the conversion price; certain prior investors will also be entitled to certain make-good shares; provided that, the Series U may not be converted into common stock to the extent such conversion would result in the holder beneficially owning more than 4.99% of the Company’s outstanding common stock (which may be increased up to 9.99% upon 61 days’ written notice). The conversion price will be equal to the lesser of $0.20 or the average closing sale price of the common stock for the five trading days prior to the conversion date. The Company will have the right (but no obligation) to redeem the Series U at any time at a redemption price equal to, if paid in cash, the stated value, or, if paid in shares of common stock, in an amount of shares determined by dividing 200% of the stated value being redeemed by the conversion price then in effect, and adding any applicable make-good shares. Between June 30, 2021 and July 7, 2021, the Company entered into subscription agreements with certain accredited investors pursuant to which the Company sold an aggregate of 150 shares of the Company’s Series U preferred stock for an aggregate purchase price of $150,000. The Company also issued an aggregate of 1,500,000 Series A warrants to the investors.
On July 20, 2021, the Company filed a certificate of withdrawal of the Company’s certificate of designation of Series V preferred stock, and filed a certificate of designation for a new series of Series V preferred stock (the “Series V”), with the Secretary of State of Nevada. Pursuant to the Series V COD, the Company designated 40,000 shares of preferred stock as Series V. The Series V has a stated value of $500 per share, and will be entitled to an annual distribution of 25% of annual net profits of newly established, Company wholly-owned, Water On Demand subsidiaries, designated by each Holder, paid within 3 months of subsidiary’s accounting year-end. The Series V will not be entitled to any voting rights except as may be required by applicable law. The Series V will be convertible into common stock of the Company pursuant to the Series V COD, provided that, the Series V may not be converted into common stock to the extent such conversion would result in the holder beneficially owning more than 4.99% of the Company’s outstanding common stock (which may be increased up to 9.99% upon 61 days’ written notice). The Company will have the right (but no obligation) to redeem the Series V at any time at a redemption price equal to, if paid in cash, the stated value plus any accrued but unpaid distributions of 25% of subsidiary’s annual net profits.
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ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
This Quarterly Report on Form 10-Q contains forward-looking statements that are subject to a number of risks and uncertainties, many of which are beyond our control, which may include statements about our:
| ● | business strategy; |
| ● | financial strategy; |
| ● | intellectual property; |
| ● | production; |
| ● | future operating results; and |
| ● | plans, objectives, expectations and intentions contained in this report that are not historical. |
All statements, other than statements of historical fact included in this report, regarding our strategy, intellectual property, future operations, financial position, estimated revenues and losses, projected costs, prospects, plans and objectives of management are forward-looking statements. When used in this report, the words “could,” “believe,” “anticipate,” “intend,” “estimate,” “expect,” “project” and similar expressions are intended to identify forward-looking statements, although not all forward-looking statements contain such identifying words. All forward-looking statements speak only as of the date of this report. You should not place undue reliance on these forward-looking statements. Although we believe that our plans, intentions and expectations reflected in or suggested by the forward-looking statements we make in this report are reasonable, we can give no assurance that these plans, intentions or expectations will be achieved. These statements may be found under “Management’s Discussion and Analysis of Financial Condition and Results of Operations,” as well as in this report generally. Actual events or results may differ materially from those discussed in forward-looking statements as a result of various factors. In light of these risks and uncertainties, there can be no assurance that the forward-looking statements contained in this filing will in fact occur.
Organizational History
OriginClear, Inc. (“we”, “us”, “our”, the “Company” or “OriginClear”) was incorporated on June 1, 2007 under the laws of the State of Nevada. We have been engaged in business operations since June 2007. In 2015, 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 13575 58th Street North, Suite 200, Clearwater, FL 33760. Our main telephone number is (727) 440-4603. Our website address is www.OriginClear.com. The information contained on, connected to or that can be accessed via our website is not part of this report.
Overview of Business
OriginClear is a water technology company which has developed in-depth capabilities over its 14-year lifespan. Those technology capabilities have now been organized under the umbrella of OriginClear Tech Group™ (www.originclear.tech).
These capabilities include:
| - | The Company’s original technology developments, known as Electro Water Separation™ and Advanced Oxidation (AOx™), which are not being pursued commercially at this time. |
| - | The Intellectual Property of Daniel M. Early, consisting of five patents and related knowhow and trade secrets, which are intended to take the place of the applications for the company’s original technology developments. |
| - | Progressive Water Treatment Inc. (“PWT”) a wholly-owned subsidiary based in Dallas, Texas which is responsible for the bulk of the company’s revenue, specializing in Engineered Solutions (custom treatment systems). |
| - | Modular Water Systems (“MWS”), a division based at PWT, which implements the Daniel M. Early Intellectual Property. |
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Water on Demand™: a new strategic direction.
OriginClear is planning a new business, which is outsourced water treatment, intending to offer private businesses the ability to pay for their water treatment and purification services on a pay-per-gallon basis. In the water industry, this is commonly known as Design-Build-Own-Operate or DBOO. On April 13, 2021, we announced formation of a wholly-owned subsidiary called Water On Demand #1, Inc. (WOD #1) to pursue capitalization of the equipment required.
At this time, the Company does not have the ability to carry out at scale the Operation & Maintenance (O&M) activities which are required to fulfill the service obligations of DBOO contracts. Our current plan is to pursue a first DBOO contract as a use case, and thereafter either develop, contract or acquire the O&M capability. The Company is currently in discussions with prospective clients for this test DBOO contract. However, no commitments have been made, and the talks may not succeed. The outsourcing program known as Water On Demand requires both funding for WOD #1, and such a first client, to launch commercially.
Outsourcing Risk
The Company believes water is a risk that smart managers will outsource, especially with worsening inflation. Outsourcing through what we call Water on Demand™ means that these companies do not have to worry about the problem, either financing it or managing it.
As an example, in Information Technology, few companies operate their own server in-house powering their website. Rather, such servers are typically managed by professionals through a service level agreement. In the water industry, when applied to outsourced water treatment, a service level agreement is known as Operation & Maintenance (O&M) Agreement. When the vendor retains ownership of the equipment, the concept is expanded to “Own and Operate”, an extension of the basic “Design and Build”, for a full offering known as DBOO, which is very similar to the solar energy programs known as Power Purchase Agreements (PPAs).
Under such a plan, a business can outsource its wastewater treatment by simply signing on the dotted line; instantly avoiding most capital expense, and the trouble of managing something that is a distraction from their core business.
We believe this is financially and operationally attractive to industrial, agricultural and commercial water users, while OriginClear’s Water On Demand program can potentially drive speeded-up deals and more revenue streams from providing water treatment as a service.
The scale of these systems is relatively small: a recent analysis showed that the 74 quotes that Modular Water Systems™ has at various stages of negotiation for 2021 average only $232,246 each. But capital is scarce for such private systems, and therefore we believe a fully outsourced solution is attractive to these businesses.
Based on its analysis, the Company believes that half of its prospective clients for Modular Water Systems would approve its quotes if they could pay for their water as a monthly bill and not a capital expense.
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The Decentralization Megatrend
Figure 1
As municipalities continue to be underfunded (Figure 1) with rising water rates (Figure 2), businesses are increasingly choosing to treat and purify their own water, in a trend known as Decentralized Water, first described in the Lux Research presentation of June 28, 2016. (https://members.luxresearchinc.com/research/report/20060).
Figure 2
Small, modular systems as sold by our Modular Water Systems division meet the needs of this new segment. Indeed, an estimated two-thirds of the Modular Water Systems bidding backlog consists of such private (vs. municipal) customers.
A Company internal analysis has shown that as many as two-thirds of these prospective private customers (in other words, half of the overall backlog) could be candidates for outsourced water treatment which they would pay for by the gallon purified or treated, instead of paying for the capital expense up front. In other words, the Company believes such financing has the potential to increase the Company’s revenues substantially, with additional service fees potentially improving profits.
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This is known in the water industry as Design/Build/Own/Operate (“DBOO”), or colloquially as water equipment as a service. The Company is working in this new direction under the branding Water on Demand™ (https://www.originclear.com/water-on-demand).
The bulk of such sales opportunities are in the small size systems, averaging $250,000 and larger. We believe that our ability to deliver modular systems gives us a competitive advantage over larger water companies that we believe have difficulty scaling down into these smaller DBOO projects.
Also, the portable nature of these prefabricated, drop-in-place Modular Water Systems may provide a competitive benefit for a pure service model where the equipment remains the property of the Company, because their mobility enables repossession in the event the client fails to pay their monthly bill. We believe this is a key competitive advantage.
Implementation of Water On Demand
We have taken initial steps in this new direction. On February 3, 2021, we announced that we agreed to acquire our first real estate asset to finance water projects. Ivan Anz, OriginClear advisor and founder of strategic partner Philanthroinvestors® Inc. invested certain real estate assets through a securities purchase agreement. Per the agreement, in exchange for preferred stock and warrants, the Company received real property valued at $630,000. The real property has been transferred to the Company through an irrevocable power of attorney, subject to certain rights of rescission. The real property includes residential real estate in Buenos Aires, Argentina valued at $580,000, and eight undeveloped lots valued at $50,000 in Terralta private neighborhood development. There is no prospective date of sale, however, the real property has been listed actively on the market to be sold. We intend to apply the proceeds received from the sale of the real property to finance water systems either in support of standard equipment sales by our subsidiary Progressive Water Treatment (“PWT”), or for the newer Water On Demand pre-funded water systems, or any combination thereof.
On March 17, 2021, OriginClear incorporated Water On Demand #1 Inc. (“WOD#1”) in Nevada to offer private businesses the ability to pay for their water treatment and purification services on a pay-per-gallon basis. However, the Company cautions that efforts to obtain capital to underwrite WOD #1 may not succeed.
The Company is now actively evaluating potential clients for a test of water treatment and purification services on a pay-per-gallon basis, but a first agreement has not been reached.
Advisory Support for Water On Demand
In September, 2020, Philanthroinvestors had entered a strategic agreement with OriginClear and had listed the Company on its new Water Philanthroinvestors program. At the same time, the Company appointed Philanthroinvestors Founder, Ivan Anz and CEO, Arte Maren to OriginClear's Board of Advisors.
Mr. Anz and Mr. Maren are actively advising the Company in its development of Water On Demand.
H2O
On May 10, 2021, OriginClear announced that it had filed “System And Method For Water Treatment Incentive”, a patent application for using blockchain technology and non-fungible tokens (NFT) to simplify the distribution of payments on outsourced water treatment and purification services billed on a pay-per-gallon basis ahead of inflation, or Water On Demand.
On May 16, 2021, the Company filed a trademark for the mark $H2O (also referred to as H2O) as the blockchain system representing this activity.
On June 10, 2021, the Company named Ricardo Fabiani Garcia, key OriginClear investor and a veteran technologist, to the Company’s Board of Advisors. Garcia will advise the management team as it sets up the roadmap and chooses the resources for the $H2O project.
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The basic intended use of the blockchain system is to streamline payments and eliminate human error. In this respect we believe it is very similar to J.P. Morgan’s JPM Coin:
“In 2019, J.P. Morgan became the first global bank to design a network to facilitate instantaneous payments using blockchain technology - enabling 24/7, business-to-business money movement by unveiling JPM Coin.” (https://www.jpmorgan.com/solutions/cib/news/digital-coin-payments).
Like JPM Coin, we plan to streamline the delivery of payment contracts that, in our case, could last for decades.
Our patent application is the first step in our development process for this blockchain system, which we expect to last at least several months. We are not currently a blockchain or cryptocurrency developer and would need to develop or contract for this capability. There is no guarantee that this effort would succeed.
Depending on the final form that H2O takes, we may encounter regulatory concerns that we cannot guarantee we will overcome. In that event, we would fall back on ordinary financial payment systems.
Future Potential of H2O
We believe $H2O could be a way to package continuous contractual profit-share income for that investor or stakeholder’s share of the life of the water equipment, adjusted for inflation. To allow the holder to transfer or “swap” it anytime and ultimately, OriginClear could accept $H2O for the funding of new Water On Demand projects, with the potential for subsidized Impact Investment.
All these scenarios are highly speculative, and none may come about. In addition, there may be regulatory restrictions on the issuance and transfer of $H2O.
Prior to the commercialization of $H2O, we would need to fully address all regulatory requirements, and as covered above, this may not be possible; in which case we would use ordinary financial systems for payments to investments and stakeholders.
Water On Demand outsourced water treatment does not rely on any blockchain system for its operation, and can accomplish its operational goals using ordinary financial and currency channels.
OriginClear Tech Group
As stated above, all of our technology and operations activities have been centralized under OriginClear Tech Group (“OTG”), enabling a total focus at the corporate level on the Water On Demand strategy.
The mission of OTG is to provide expertise and technology to help make clean water available for all. Specifically, OTG houses the following initiatives:
| 1. | We are building a network of customer-facing water brands to expand our global market presence and our technical expertise. These include the wholly-owned subsidiary, Progressive Water Treatment, and the Modular Water Systems brand. |
| 2. | We manage relationships with partners worldwide who are licensees and business partners. |
| 3. | We develop new technology approaches and business models in the lab, 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. OTG also is actively working on the ability to deliver Operation & Maintenance (O&M) capability at scale, to support Water On Demand outsourced treatment and purification programs, and is evaluating a pilot program to achieve this. OTG intends to support the development of the $H2O blockchain system, which may replace WaterChain altogether. And in 2020, the Company also completed a pilot program with a rental program of a product known as Pool Preserver™, and developed a career-building program for entrepreneurs termed Waterpreneurs™. Water As A Career remains a pilot program and the Company does not plan to expand it at this time. |
Water is our most valuable resource, and the mission of OTG is to improve the quality of water and help return it to its original and clear condition.
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Potential Acquisitions
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.
OTG 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.
We are particularly interested in companies which successfully execute on Design-Build-Own-Operate or DBOO.
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, similarly, may not become commercial successes.
To support the new DBOO and acquisition goals, on June 15, 2021 the Company announced that it named Prasad Tare as the Company’s Chief Financial Officer.
Prasad brings over 15 years of experience in public accounting, financial reporting, risk and internal controls advisory services. His skillset includes Company-wide risk assessments to improve focus to critical areas as well as more efficient and effective audit activities.
OTG Milestones
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 Division (MWS) around Mr. Early’s technology and perspective customers. The Company has funded the development of this division with internal cash flow. In Q1 of 2020, the Company fully integrated MWS with wholly-owned Progressive Water Treatment Inc. Mr. Early is titled Chief Engineer of OriginClear.
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 division as an integral part of PWT, and integrating its proprietary technology, OTG aims to offer a complementary, end-to-end offering to serve growing corporate demand for outsourced water treatment.
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PWT’s Business
Since 1995, PWT has been designing and manufacturing a complete line of water treatment systems for municipal, industrial and pure water applications. 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 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.
On April 15, 2021, OriginClear announced that its Progressive Water Treatment division is now shipping BroncBoost™, its workhorse Booster Pump Station equipment line. Engineered and built in Texas, BroncBoost allows customers to control water flow rates and pressure for mission critical water distribution systems.
Modular Water Systems
On July 19, 2018, the Company launched its Modular Water Treatment Division, offering a unique product line of prefabricated water transport and treatment systems. Daniel “Dan” Early P.E. (Professional Engineer) heads the division and along with the intellectual property which the Company licensed exclusively worldwide for three years, 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.
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Patents
On May 10, 2021, OriginClear announced that it had filed “System And Method For Water Treatment Incentive”, a patent application for using blockchain technology and non-fungible tokens (NFT) to simplify the distribution of payments on outsourced water treatment and purification services billed on a pay-per-gallon basis ahead of inflation.
On June 25, 2018, Dan 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 |
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 or Structural Reinforced ThermoPlastic), 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.
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In April 2019, we completed the expansion of our manufacturer’s representative network to serve both PWT and MWS for customer lead generation.
Critical Accounting Policies
The Securities and Exchange Commission (“SEC”) defines “critical accounting policies” as those that require application of management’s most difficult, subjective or complex judgments, often as a result of the need to make estimates about the effect of matters that are inherently uncertain and may change in subsequent periods. Not all of the accounting policies require management to make difficult, subjective or complex judgments or estimates. However, the following policies could be deemed to be critical within the SEC definition.
Revenue Recognition
We recognize revenue when services are performed, and at the time of shipment of products, provided that evidence of an arrangement exists, title and risk of loss have passed to the customer, fees are fixed or determinable, and collection of the related receivable is reasonably assured.
Revenues and related costs on construction contracts are recognized as the performance obligations for work are satisfied over time in accordance with Accounting Standards Codification (“ASC”) 606, Revenue from Contracts with Customers. Under ASC 606, revenue and associated profit, will be recognized as the customer obtains control of the goods and services promised in the contract (i.e., performance obligations). All un-allocable indirect costs and corporate general and administrative costs are charged to the periods as incurred. However, in the event a loss on a contract is foreseen, the Company will recognize the loss, as it is determined. 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, 2021, the amounts reported for cash, prepaid expenses, accounts payable and accrued expenses approximate the fair value because of their short maturities.
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Results of Operations for the three months ended March 31, 2021 compared to the three months ended March 31, 2020.
Revenue and Cost of Sales
For the three months ended March 31, 2021, we had revenue of $796,178 compared to $1,092,438 for the three months ended March 31, 2020. Cost of sales for the three months ended March 31, 2021 was $691,521 compared to $879,145 for the three months ended March 31, 2020. Revenue and cost of sales decreased primarily due to our subsidiary’s decrease in revenue due to the impact of the Covid-19 pandemic.
Our gross profit was $104,657 and $213,293 for the three months ended March 31, 2021 and 2020, respectively.
Selling and Marketing Expenses
For the three months ended March 31, 2021, we had selling and marketing expenses of $431,508, compared to $374,923 for the three months ended March 31, 2020. The increase in selling and marketing expenses was primarily due to an increase in marketing and investor relations expense.
General and Administrative Expenses
For the three months ended March 31, 2021, we had general and administrative expenses of $818,553 compared to $549,911 for the three months ended March 31, 2020. The increase in general and administrative expenses was primarily due to an increase in professional and legal fees and outside services.
Research and Development Cost
For the three months ended March 31, 2021, our research and development cost was $0 compared to $28,982 for the three months ended March 31, 2020. The decrease in research and development costs was primarily due to decrease in salary expense.
Other Income and (Expenses)
Other income and (expenses) increased by $39,053,838 to $(16,700,540) for the three months ended March 31, 2021, compared to $22,353,298 for the three months ended March 31, 2020. The increase was due primarily to an increase in non-cash accounts associated with the change in fair value of the derivatives in the amount of $38,182,578, increase in interest expense of $85,620, increase in other income of $3,999, an increase in loss on conversion of preferred stock in the amount of $792,041 offset by an increase in unrealized gain on investment securities in the amount of $50,400.
Net Income/(Loss)
Our net income (loss) decreased by $39,458,989 to $(17,857,575) for the three months ended March 31, 2021, compared to net income of $21,601,414 for the three months ended March 31, 2020. The majority of the decrease in net income was due primarily to an increase in other expenses associated with the net change in fair value of 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, 2021. 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.
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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 negative effect on our liquidity.
At March 31, 2021 and December 31, 2020, we had cash of $539,731 and $409,591, respectively, and a working capital deficit of $37,431,192 and $21,699,304, respectively. The increase in working capital deficit was due primarily to an increase in non-cash derivative liabilities and convertible notes, an increase in cash, contract receivable, inventory assets, other receivable, accounts payable, with a decrease in contract assets, prepaid expenses, accrued expenses, and contracts liabilities.
During the period ended March 31, 2021, we raised an aggregate of $1,109,425 from the sale of preferred stock in private placements and received an aggregate of $60,000 in proceeds from issuance of convertible promissory notes. Our ability to continue as a going concern is dependent upon raising capital from financing transactions and future revenue.
Net cash used in operating activities was $999,665 for the three months ended March 31, 2021, compared to $926,200 for the prior period ended March 31, 2020. The increase in cash used in operating activities was primarily due to an increase in contract liabilities.
Net cash flows used in investing activities for the three months ended March 31, 2021 and 2020, were $4,500 and $0, respectively. The increase in investing activities was due to payment of accounts payable for purchase of fixed assets.
Net cash flows provided by financing activities was $1,146,201 for the three months ended March 31, 2021, as compared to $732,886 for the three months ended March 31, 2020. The increase in cash provided by financing activities was due primarily to an increase in proceeds for issuance of preferred stock and loan payable. 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 maintain and 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, 2021 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 law counts for sums due for services allegedly performed, and fraud. The Complaint was filed by RDI Financial, LLC (“RDI”), an alleged assignee of Interdependence, Inc., and named the Company and its 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 claimed to be entitled to enforce the contract as the assignee, and demanded monetary damages in the aggregate amount of $630,000. 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, and with the absence of prior notice or service of the suit, an improper default promptly challenged. In October 2019, the Court vacated the default and judgment, and granted the Company and WaterChain leave to file an Answer and Cross-Complaint against RDI and Interdependence. Through these filings, the Company and WaterChain, Inc. contested the allegations and claims in the Complaint, denied that Interdependence performed the required services, and contended that the Company overpaid Interdependence $40,000 for whatever limited work was done. More specifically, in November 2019, an Answer was filed by the Company and WaterChain 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. The Company alleged that Interdependence misrepresented the nature and scope of the services which were to be provided and its ability to provide them, falsely promised and promoted the results it would obtain for the Company and WaterChain in providing such services, and also failed to provide the Company with the services as required by the contract such that Interdependence was overpaid based on what limited work it in fact did. For those reasons, and prior to any litigation, the Company terminated the contract for non-performance. Following discovery and pleading activity, the Company and WaterChain entered into settlement negotiations with RDI to resolve this matter on a defense cost basis. The parties reached an amicable resolution and entered into a Settlement Agreement and Mutual and General Release on December 16, 2020 which provided for a less than defense cost resolution through a payment of $20,000 and stock transfers on a monthly basis through December 2021, with removal of restrictive legends occurring at six month intervals following each transfer. Notice of Settlement of Entire Case was filed with the Court in January 2021, and all Court dates vacated. Once the stock transfers and restriction removals are completed, the action will be dismissed with prejudice. All parties are fully and timely performing under the Settlement Agreement, and no further issues or proceedings, or fees and costs, are anticipated.
On January 12, 2021, OriginClear, Inc. Progressive Water Treatment, Inc. and T. Riggs Eckelberry, individually (collectively, the “iKAHN Plaintiffs”), filed a complaint in the Supreme Court for the State of New York in the County of Ontario against iKAHN Capital LLC (“iKAHN”). The case stems from the purported “Agreement for the Purchase and Sale of Future Receipts” that OriginClear and iKAHN Capital entered into on September 7, 2018 (the “iKAHN Agreement”). The iKAHN Plaintiffs alleged that the iKAHN Agreement is, in fact, a loan that violates New York’s usury laws, and requested that the Court declare the iKAHN Agreement void and unenforceable; vacatur of the judgment entered against the iKAHN Plaintiffs on November 6, 2018 in the amount of $30,205; an award of attorneys’ fees and costs, and court costs and fees; and any and all other relief the iKAHN Plaintiffs may be entitled to. On April 22, 2021, the iKAHN Plaintiffs and iKAHN settled the dispute on the following terms: (i) vacatur of the judgment obtained by iKAHN against the iKAHN Plaintiffs; (ii) release of any and all bank levies, liens, security interests, powers of attorney, and other encumbrances iKAHN may have against the iKAHN Plaintiffs; and (iii) dismissal of the action filed by the iKAHN Plaintiffs against iKAHN with prejudice. Accordingly, the iKAHN Plaintiffs no longer owe any further amounts to iKAHN with respect to the iKAHN Agreement.
On November 16, 2020, Progressive Water Treatment, Inc., OriginClear, Inc. and T. Riggs Eckelberry, individually (collectively, the “Yellowstone Plaintiffs”), filed a complaint in the Supreme Court for the State of New York in and for the County of Erie against Yellowstone Capital, LLC (“Yellowstone”). The case stems from the purported “Secured Merchant Agreement” that OriginClear and Yellowstone entered into on July 19, 2018 (the “Yellowstone Agreement”). The Yellowstone Plaintiffs alleged that the Yellowstone Agreement is, in fact, a loan that violates New York’s usury laws, and requested that the Court declare, and requested that the Court declare the Yellowstone Agreement void and unenforceable; vacatur of the judgment entered against the judgment that was entered against the Yellowstone Plaintiffs on November 7, 2018 in the amount of $99,303; an award of attorneys’ fees and costs, and court costs and fees; and all other relief to which the Yellowstone Plaintiffs may be entitled. On December 4, 2020, Yellowstone filed a Motion to Dismiss the Yellowstone Plaintiffs’ Complaint. On January 5, 2021, Yellowstone’s Motion to Dismiss was granted. On January 5, 2021, the Yellowstone Plaintiffs appealed the trial court’s decision & order granting Yellowstone’s Motion to Dismiss to the New York Supreme Court Appellate Division, Fourth Department. On May 11, 2021, the Yellowstone Plaintiffs filed their opening memorandum of law in support of appeal. On May 24, 2021, Yellowstone filed a letter requesting an extension of its time to respond. The appellate court granted Yellowstone’s request and extended its time to respond to July 12, 2021. On June 25, 2021, Yellowstone filed a second letter requesting an extension of its time to respond. The appellate court granted Yellowstone’s request and extended its time to respond to August 11, 2021.
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On October 12, 2020, OriginClear, Inc. Progressive Water Treatment, Inc. and T. Riggs Eckelberry, individually (collectively, the “GTR Plaintiffs”), filed a complaint in the Supreme Court for the State of New York in and for the County of Ontario against GTR Source LLC (“GTR”). The case stems from the purported Merchant Agreements that OriginClear and GTR entered into on July 20, 2018 and August 28, 2018 (together, the “GTR Agreements”). The GTR Plaintiffs are alleging that the GTR Agreements are, in fact, loans, and not merchant cash advances, and are in violation of New York’s usury laws, and requesting that the Court declare the GTR Agreements void and unenforceable; that the Judgment that was entered against the GTR Plaintiffs on March 20, 2019 in the amount of $143,083 be vacated; that the Settlement Agreement entered into by and between OriginClear and GTR, dated December 13, 2018, be declared void and unenforceable; restitution in the amount of $149,751; attorneys’ fees and costs; court costs and fees; and all other relief to which the GTR Plaintiffs may be entitled. On October 16, 2020, the GTR Plaintiffs filed an Order to Show Cause seeking a Temporary Restraining Order and Preliminary Injunction. On October 23, 2020, the Court granted the GTR Plaintiffs’ request for a Temporary Restraining Order, which remains in effect as of the date hereof. On November 25, 2020, the GTR Plaintiffs filed an amended complaint, which included 1 defendant, Tzvi “Steve” Reich, the President and Manager of GTR (together with GTR, the “GTR Defendants”), and 2 new causes of action: violation of the Racketeer Influenced and Corrupt Organizations Act, 18 U.S.C. § 1962(c), and Conspiracy, 18 U.S.C. § 1962(d) (the “Amended Complaint”). On December 1, 2020, the GTR Defendants removed the case to the United States District Court for the Western District of New York. On March 12, 2021, the GTR Defendants filed a Motion to Dismiss the Amended Complaint. As of the date hereof, the Motion to Dismiss has been fully briefed by the parties to the action; however, the United States District Court for the Western District of New York has not yet scheduled oral argument or issued a decision on the GTR Defendants’ motion.
On September 21, 2020, OriginClear, Inc. Progressive Water Treatment, Inc. and T. Riggs Eckelberry, individually (collectively, the “C6 Plaintiffs”), filed a complaint in the Supreme Court for the State of New York in and for the County of Boome against C6 Capital LLC (“C6 Capital”). The case stems from the purported “Purchase Agreement for the Sale of Receipts” that OriginClear and C6 Capital entered into on July 17, 2018 (the “C6 Agreement”). The C6 Plaintiffs are alleging that the C6 Agreement is, in fact, a loan, and not a merchant cash advance, and is in violation of New York’s usury laws, and requesting that the Court declare the C6 Agreement void and unenforceable; that the Judgment that was entered against the C6 Plaintiffs on November 7, 2018 in the amount of $64,337 be vacated; attorneys’ fees and costs; court costs and fees; and all other relief to which the C6 Plaintiffs may be entitled. On March 12, 2021, the C6 Plaintiffs and C6 Capital agreed to settle the dispute on the following terms: (i) vacatur of the judgment obtained by C6 Capital against the C6 Plaintiffs; (ii) release of any and all bank levies, liens, security interests, powers of attorney, and other encumbrances C6 Capital may have against the C6 Plaintiffs; and (iii) dismissal of the action filed by the C6 Plaintiffs against C6 Capital with prejudice. Accordingly, the C6 Plaintiffs no longer owe any further amounts to C6 Capital with respect to the C6 Agreement. Furthermore, the sister-state judgment C6 Capital obtained against the C6 Plaintiffs in California is currently in the process of being vacated by stipulation.
On September 18, 2019, Expansion Capital Group, LLC (“Expansion”) filed a complaint against Progressive Water Treatment, Inc., T. Riggs Eckelberry, individually, and Marc Stevens, individually (collectively, the “Expansion Defendants”) in the District Court for the 429th Judicial District, Collin County, Texas alleging breach of a Business Loan Agreement (the “Business Loan”), dated July 9, 2018, under which Expansion loaned $300,000 to Progressive Water Treatment, Inc., with an expectation of being repaid $408,000. On December 30, 2019, Expansion and the Expansion Defendants entered into a Settlement Agreement (the “Expansion Settlement”), pursuant to which the Expansion Defendants agreed to pay Expansion $252,000 in $10,500 monthly installments over a 24-month period. On December 9, 2020, the Expansion Defendants filed an against Expansion in the District Court for the 429th Judicial District, Collin County, Texas alleging that the Business Loan and Expansion Settlement constitute a usurious loan, in violation of Texas law (the “Expansion Action”). As of the date hereof, counsel for Expansion and the Expansion Defendants are currently engaged in settlement negotiations concerning the Expansion Action.
On February 12, 2019, Auctus Fund, LLC (“Auctus”) filed a complaint against OriginClear in the United States District Court for the District of Massachusetts for numerous claims arising from two convertible promissory notes and accompanying securities purchase agreements. On March 13, 2019, Auctus and OriginClear entered into a Settlement Agreement and Mutual General Release, under which Auctus would be permitted to convert $570,000 into OriginClear securities pursuant to the terms set forth in the convertible promissory notes. On February 2, 2021, OriginClear filed a Motion to Set Aside the Settlement Agreement as Void under Section 29(b) of the Securities Exchange Act of 1934 (the “Act”) for Auctus’ violation of Section 15(a) of the Act. If granted, the Settlement Agreement would be declared void and unenforceable. As of the date hereof, the Motion to Set Aside the Settlement Agreement has been fully briefed by the parties to the action; however, the United States District Court for the District of Massachusetts has not yet scheduled oral argument or issued a decision on OriginClear’s motion.
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Not required for a smaller reporting company.
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds.
On January 25, 2021, the Company issued a convertible promissory note in the amount of $60,000, convertible into shares of the Company’s common stock at a conversion price equal to the lesser price of (a) $0.05 per share, (b) 50% of the lowest trade price of common stock recorded on any trade after the effective date, or (c) the lowest effective price per share granted. The Company relied upon the exemption from registration provided under Section 4(a)(2) under the Securities Act of 1933, as amended (the “Securities Act”) for transactions not involving a public offering.
During the three months ended March 31, 2021, the Company issued an aggregate of 1,177 shares of Series M preferred stock for an aggregate purchase price of $29,425. The Company relied upon the exemption from registration provided under Regulation A under the Securities Act of 1933, as amended.
During the three months ended March 31, 2021, the Company issued an aggregate of 1,080 shares of Series R preferred stock, 47,323,340 Series A Warrants, and 10,900,000 Series B Warrants, for an aggregate purchase price of $1,080,000. The Company relied upon the exemption from registration provided under Section 4(a)(2) under the Securities Act for transactions not involving a public offering.
During the three months ended March 31, 2021, the Company issued an aggregate of 630 shares of Series T preferred stock for transfer of real property. The Company relied upon the exemption from registration provided under Section 4(a)(2) under the Securities Act for transactions not involving a public offering.
Item 3. Defaults Upon Senior Securities.
As of the date of the filing of this report, the Company has 260 shares of Series F preferred stock outstanding, 160 of which the Company was required to, and failed to redeem on September 1, 2020, for an aggregate redemption price (equal to the stated value) of $160,000.
As of the date of the filing of this report, the Company has 50 shares of Series G preferred stock outstanding which the Company was required to, and failed to redeem on April 30, 2021, for an aggregate redemption price (equal to the stated value) of $50,000.
As of the date of the filing of this report, the Company has 285 shares of Series I preferred stock outstanding which the Company was required to, and failed to redeem between May 2, 2021 and June 10, 2021, for an aggregate redemption price (equal to the stated value) of $285,000.
Item 4. Mine Safety Disclosures
Not applicable.
During the three months ended March 31, 2021, the Company issued an aggregate of 1,080 shares of Series R preferred stock, 47,323,340 Series A Warrants, and 10,900,000 Series B Warrants, for an aggregate purchase price of $1,080,000. The Company relied upon the exemption from registration provided under Section 4(a)(2) under the Securities Act for transactions not involving a public offering.
During the three months ended March 31, 2021, the Company issued an aggregate of 630 shares of Series T preferred stock for transfer of real property. The Company relied upon the exemption from registration provided under Section 4(a)(2) under the Securities Act for transactions not involving a public offering.
| Exhibit Number |
Description of Exhibit | |
| 31.1 | Certification by Chief Executive Officer, required by Rule 13a-14(a) or Rule 15d-14(a) of the Exchange Act.* | |
| 31.2 | Certification by Chief Financial Officer, required by Rule 13a-14(a) or Rule 15d-14(a) of the Exchange Act.* | |
| 32.1 | Certification of Chief Executive Officer pursuant to 18 U.S.C. §1350 as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.** | |
| 32.2 | Certification of Chief Financial Officer 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. |
40
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.
| August 4, 2021 | ORIGINCLEAR, INC. |
| /s/ T. Riggs Eckelberry | |
| T. Riggs Eckelberry | |
| Chief Executive Officer | |
| (Principal Executive Officer) and |
| /s/ Prasad Tare | |
| Prasad Tare | |
| Chief Financial Officer | |
| (Principal Financial and Accounting Officer) |
41
Exhibit 31.1
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, 2021;
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.
| August 4, 2021 | /s/ T. Riggs Eckelberry |
| T. Riggs Eckelberry | |
| Chief Executive Officer (Principal Executive Officer) |
Exhibit 31.2
CERTIFICATION
I, Prasad Tare, certify that:
1. I have reviewed this quarterly report on Form 10-Q of OriginClear, Inc., for the quarter ended March 31, 2021;
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.
| August 4, 2021 | /s/ Prasad Tare |
| Prasad Tare | |
| Chief Financial Officer (Principal Financial Officer) |
Exhibit 32.1
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, 2021 as filed with the Securities and Exchange Commission on the date hereof (the “Report”), I, T. Riggs Eckelberry, Chief Executive 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.
| August 4, 2021 | By: | /s/ T. Riggs Eckelberry |
| T. Riggs Eckelberry | ||
| Chief Executive Officer (Principal Executive Officer) |
Exhibit 32.2
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, 2021 as filed with the Securities and Exchange Commission on the date hereof (the “Report”), Prasad Tare, 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.
| August 4, 2021 | By: | /s/ Prasad Tare |
| Prasad Tare | ||
| Chief Financial Officer (Principal Financial Officer) |