Originclear, Inc 10-K for FY2019
Originclear, Inc. (OCLN)
About this 10-K
Originclear, Inc filed this 10-K on May 29, 2020, covering the fiscal year ended December 31, 2019 (FY2019).
Headline figures
Fiscal year ended December 31, 2019, as reported in this filing, compared with the same period a year earlier where the filing states it.
- Revenue
- $3.59M
- down 22.6% from $4.64M a year earlier
- Net loss
- $27.47M
- compared with a net loss of $11.35M a year earlier
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
☒ ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 2019
Or
☐ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from ___________ to ___________
Commission file number: 333-147980
ORIGINCLEAR, INC.
(Exact name of registrant as specified in charter)
| Nevada | 26-0287664 | |
| (State or other jurisdiction of incorporation or organization) |
(I.R.S. Employer Identification No.) |
2535 E. University Drive, McKinney, TX 75069
(Address of principal executive offices) (Zip Code)
Registrant’s telephone Number: (323) 939-6645
Securities registered pursuant to Section 12(b) of the Act: None
Securities registered pursuant to Section 12(g) of the Act: None
| Title of each class | Trading Symbol(s) | Name of each exchange on which registered | ||
| N/A | N/A | N/A |
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. ☐ Yes ☒ No
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act. ☐ Yes ☒ No
Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. ☒ Yes ☐ No
Indicate by check mark 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 if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. ☒
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer”, “accelerated filer”, “non-accelerated filer”, and “smaller reporting company” in Rule 12b-2 of the Exchange Act.
| 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
The aggregate market value of the voting stock held by non-affiliates of the registrant was approximately $1,450,929 based upon the closing sales price of the registrant’s common stock on June 28, 2019 of $0.80 per share.
At May 28, 2020, 9,812,845 shares of the registrant’s common stock were outstanding.
DOCUMENTS INCORPORATED BY REFERENCE: NONE
TABLE OF CONTENTS
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NOTE ABOUT FORWARD-LOOKING STATEMENTS
This Form 10-K contains forward-looking statements that are subject to a number of risks and uncertainties, many of which are beyond our control, which may include statements about our:
| ● | business strategy; | |
| ● | financial strategy; | |
| ● | intellectual property; | |
| ● | production; | |
| ● | future operating results; and | |
| ● | plans, objectives, expectations and intentions contained in this report that are not historical. |
All statements, other than statements of historical fact included in this report, regarding our strategy, intellectual property, future operations, financial position, estimated revenues and losses, projected costs, prospects, plans and objectives of management are forward-looking statements. When used in this report, the words “could,” “believe,” “anticipate,” “intend,” “estimate,” “expect,” “project” and similar expressions are intended to identify forward-looking statements, although not all forward-looking statements contain such identifying words. All forward-looking statements speak only as of the date of this report. You should not place undue reliance on these forward-looking statements. Although we believe that our plans, intentions and expectations reflected in or suggested by the forward-looking statements we make in this report are reasonable, we can give no assurance that these plans, intentions or expectations will be achieved. These statements may be found under “Management’s Discussion and Analysis of Financial Condition and Results of Operations,” “Business,” “Properties,” as well as in this report generally. Actual events or results may differ materially from those discussed in forward-looking statements as a result of various factors, including, without limitation, the risks outlined under “Risk Factors” and matters described in this report generally. In light of these risks and uncertainties, there can be no assurance that the forward-looking statements contained in this filing will in fact occur.
EXPLANATORY NOTE
The Company previously filed a Current Report on Form 8-K with the Securities and Exchange Commission on March 16, 2020 (the “Current Report”) to avail itself of the relief provided by the Securities and Exchange Commission (SEC) Order under Section 36 of the Securities and Exchange Act of 1934, as amended (the “Exchange Act”), granting exemptions from specified provisions of the Exchange Act, as set forth in SEC Release No. 34-88318 (the “Order”). By filing the Current Report on Form 8-K, the Company relied on the Order to receive until May 14, 2020 (an additional 45 days from the original filing deadline of May 14, 2020) to file its Annual Report on Form 10-K for the fiscal year ended December 31, 2019 (the “Annual Report”) due to the circumstances related to COVID-19. In particular, COVID-19 has caused severe disruptions in transportation and limited access to the Company’s facilities resulting in limited support from its staff and professional advisors. This in turn, delayed the Company’s ability to complete its audit and prepare the Annual Report.
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Organizational History
OriginClear, Inc. (“we”, “us”, “our”, the “Company” or “OriginClear”) was incorporated on June 1, 2007 under the laws of the State of Nevada. We have been engaged in business operations since June 2007. We moved into the commercialization phase of our business plan having previously been primarily involved in research, development and licensing activities. Our principal offices are located at 2535 E. University Drive, McKinney, TX 75069. Our main telephone number is (323) 939-6645. Our website address is www.OriginClear.com. In addition to announcing material financial information through our investor relations website, press releases, SEC filings and webcasts, we also intend to use the following social media channels as a means of disclosing information about our products, our planned financial and other announcements, our attendance at upcoming investor and industry conferences, and other matters and for complying with our disclosure obligations under Regulation FD:
| ● | OriginClear’s Twitter Account (https://twitter.com/OriginClear) | |
| ● | OriginClear’s Facebook Page (https://www.facebook.com/OriginClear) | |
| ● | OriginClear’s LinkedIn Page (https://www.linkedin.com/company/2019598) |
The information we post through these social media channels may be deemed material. Accordingly, investors should monitor these accounts, in addition to following the company’s press releases, SEC filings, public conference calls and webcasts. This list may be updated from time to time.
We have not incorporated by reference into this report the information in, or that can be accessed through, our website or social media channels, and you should not consider it to be a part of this report.
On April 21, 2020, OriginClear announced the relocation of its headquarters from California to its PWT unit near Dallas, Texas. Efficiency of operations, personnel and revenue, and the importance of the regional water market were cited as key factors.
Overview of Business
Our mission is to provide expertise and technology to help make clean water available for all. Specifically, we have the following initiatives:
| 1. | We license our technology worldwide to treat heavily polluted waters and also to remove harmful micro-contaminants from drinking water, using minimal energy, chemicals, and materials. |
| 2. | We are building a network of customer-facing water brands to expand our global market presence and our technical expertise. |
| 3. | We develop new business models, such as Investor Water™ and WaterChain™, both of which are designed to help achieve funding for water treatment and management systems. Both projects are in a research and development phase. |
Water is our most valuable resource, and the mission of OriginClear is to improve the quality of water and help return it to its original and clear condition.
OriginClear Group™
Outsourcing is a fast-growing reality in water treatment. Tougher regulations, water scarcities and general outsourcing trends are driving industrial and agricultural water treatment users to delegate their water problem to service providers. As Global Water Intelligence pointed out in their report on October 30, 2015, “Water is often perceived as a secondary importance, with end-users increasingly wanting to focus solely on their own core business. This is driving a move away from internal water personnel towards external service experts to take control of water aspects.” External service experts are typically small–privately owned and locally operated. Consolidating these companies, and creating new players where appropriate, could lead to enormous economies of scale through sharing of best practices, technologies, and customers.
OriginClear seeks to incubate or acquire businesses that help industrial water users treat their water themselves, and often reuse it. We believe that assembling a group of such water treatment and water management businesses is an opportunity for significant growth and increased Company value for the stockholders.
The Company cautions that suitable acquisition candidates may not be identified and even if identified, the Company may not have adequate capital to complete the acquisition and/or definitive agreement may not be reached. Internally-incubated businesses are an ongoing laboratory, and similarly, may not become commercial successes.
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Group Development Milestones
Investor Water™
On March 12, 2020, the Company first discussed investor-financed water systems (www.originclear.com/ceo/water-management-increasing-real-estate-value). The concept became a new lab incubation, Investor Water, first outlined in detail on April 9, 2020 (www.originclear.com/ceo/regulation-a-takes-off). A CEO Briefing on April 23, 2020 (www.originclear.com/ceo/rolling-out-investor-water) discussed the first field pilot of the experimental program, a pool-cleaning system rental application. The Company continues to develop this unique marketplace concept to connect investors with secured water projects, but cautions that it is still very early; and based on the ongoing experiments, the Company may modify or abandon the program without notice.
Daniel M. Early/Modular Water Systems™
On June 22, 2018, OriginClear signed an exclusive worldwide licensing agreement with Daniel “Dan” Early for his proprietary technology for prefabricated water transport and treatment systems. On July 19, 2018, the Company began incubating its Modular Water Treatment 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.
Water Technologies International
On May 17, 2018, in concert with a purchase of a minority stake in the firm, the Company entered into a licensing agreement with Water Technologies International, Inc. (OTC: WTII), which commercializes the innovative SIMPOD portable waste water treatment plant, and has developed a line of atmospheric water generators. The licensing agreement gave Water Technologies access to OriginClear’s patented electrochemical treatment process, Electro Water Separation with Advanced Oxidation™ (EWS:AOx™), and support to enter the oil and gas and other markets. The Technical Assistance Program fee, another part of OriginClear’s licensing agreement, was paid to OCLN in WTII preferred shares. The license also calls for standard royalty payments to OriginClear. OCLN has retained these shares, while the two organizations are not actively collaborating today.
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, OriginClear aims to offer a complementary, end-to-end offering to serve growing corporate demand for outsourced water treatment.
PWT’s Business
Since 1995, PWT has been designing and manufacturing a complete line of water treatment systems for municipal, industrial and pure water applications. PWT designs and manufactures a complete line of water treatment systems for municipal, industrial and pure water applications. Its uniqueness is its ability to gain an in-depth understanding of customer’s needs and then to design and build an integrated water treatment system using multiple technologies to provide a complete, not partial solution.
To help address customer needs, PWT utilizes a wide range of technologies, including chemical injection, media filters, membrane, ion exchange and SCADA (supervisory control and data acquisition) technology in turnkey systems. The Company also offers a broad range of services including maintenance contracts, retrofits and replacement assistance. In addition, PWT rents equipment in contracts of varying duration. Customers are primarily served in the United States and Canada, with the company’s reach extending worldwide from Siberia to Argentina to the Middle East.
PWT is also a certified manufacturer of products using OriginClear’s proprietary Electro Water Separation™ and Advanced Oxidation (AOx™) technologies, building these on behalf of OriginClear licensees.
PWT Milestones
In the first quarter of 2019, the Company increased the number of the manufacturer’s representatives for its operating units, PWT and Modular Water Systems (“MWS”).
On Nov 7, 2019, OriginClear published a case study showing how its Modular Water System may help automotive dealership expand into rural land. The case study shows how point-of-use treatment solves lack of access to the public sewer system.
On March 5, 2020, OriginClear Announced disruptive pump and lift station pricing, stating that its prefabricated modules with a lifespan of up to 100 years now compete with precast concrete.
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Modular Water Systems
On July 19, 2018, the Company announced the launch of its Modular Water Treatment 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.
Patents
On June 25, 2018, Daniel Early granted the Company a worldwide, exclusive non-transferable license to intellectual property consisting of five issued US patents, and design software, CAD, marketing, design and specification documents (“Early IP”).
On May 20, 2020, we agreed on a renewal of the license for an additional ten years, with three-year extensions. We also gained the right to sublicense, and, with approval, to create ISO-compliant manufacturing joint ventures. All royalties surviving the 2018 license were settled.
We may contract with distribution channels (equipment distributors, oil service companies, water treatment companies, system integrators and engineering companies) of our choice to act on our behalf for the purpose of selling and integrating the Early IP.
The Early IP consists of combined protection on the materials and configurations of complete packaged water treatment systems, built into containers. The parents consist of the following:
| # | Description | Patent No. | Date Patent Issued | Expiration Date | ||||
| 1 | Wastewater System & Method | US 8,372,274 B2 Applications: WIPO, Mexico |
02/12/13 | 07/16/31 | ||||
| 2 | Steel Reinforced HDPE Rainwater Harvesting | US 8,561,633 B2 | 10/22/13 | 05/16/32 | ||||
| 3 | Wastewater Treatment System CIP | US 8,871,089 B2 | 10/28/14 | 05/07/32 | ||||
| 4 | Scum Removal System for Liquids | US 9,205,353 B2 | 12/08/15 | 02/19/34 | ||||
| 5 | Portable, Steel Reinforced HDPE Pump Station CIP | US 9,217,244 B2 | 12/22/15 | 10/20/31 |
With the rising need for local, point-of-use or point-of-discharge water treatment solutions, the Modular Water Systems licensed IP family is the core to a portable, integrated, transportable, plug-and-play system that, unlike other packaged solutions, can be manufactured in series, have a longer life and are more respectful of the environment.
The common feature of this IP family is the use of a construction material (SRTP), for the containers that is:
| ● | more durable: an estimated 75 to 100-year life cycle as opposed to a few decades for metal, or 40 to 50 years maximum for concrete; |
| ● | easier to manufacture: vessels manufacturing process can be automated; and |
| ● | recyclable and can be made out of biomaterials |
In addition, patents US 8,372,274 and US 8,871,089 (1 and 3) relate to the use of vessels or containers made out of this material combined with a configuration of functional modules, or process, for general water treatment.
Other subsequent patents, while keeping the original claims and therefore making them stronger, focus on more targeted applications. These patents outline a given combination of modules engineered inside the vessel to address a specific water treatment challenge.
Expansion of the PWT and MWS Business-Lines
Beginning with its first installation, PWT built MWS components. PWT and MWS are now fully integrated as a single profit and manufacturing center.
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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.
PRODUCTS, TECHNOLOGY AND SERVICES
OriginClear deploys advanced technologies at the point of use, with modular, prefabricated systems that create durable assets and water independence for industry, commerce and agriculture.
Failing infrastructure and the rising cost of water are driving businesses to treat their own water. OriginClear provides on-premise systems enabling very high purification and recycling levels that centralized systems cannot achieve.
Systems installed at the point of use become productive assets for businesses that also increase property values. And OriginClear helps corporations improve their environmental, social and governance (ESG) standings with water management services.
Operations & Markets
OriginClear focuses on meeting the needs of businesses looking for compact, advanced technologies that can be shipped to and installed at the point of use. The Company manufactures and distributes its professional-grade water treatment and conveyance products to commercial and industrial properties, fielding both direct and indirect sales channels to reach end-market clients such as hotels and resorts, real estate housing developments, office buildings, military installations, schools, farms, food and beverage manufacturers, industrial warehouse, oil and gas producers, and medical and pharmaceutical facilities.
From its Texas-based factory, OriginClear designs and prefabricates an entire line of plug-n-play containerized units called Modular Water Systems that enable water purification, recycling and wastewater management.
Industrial Pretreatment Waste Water Treatment Plant (WWTP) designed by Daniel M. Early, using reinforced thermoplastic modules.
These onsite modular products provide clients with water independence through ownership and operational control over water quality, enabling them to increase productivity while reducing environmental, health and safety risks from pollution, contamination and corrosion. Modular water products are trusted to balance performance with cost-effectiveness, enabling business users to go well beyond municipal standards for water quality, therefore achieving high levels of satisfaction for their own customers, and improved sustainability for their properties.
OriginClear’s water treatment equipment can boost real estate asset value as a fundamental capital improvement, combined with long-lasting water savings for the corporate bottom line.
Product Portfolio
OriginClear groups its products into three main categories:
| ● | Water Treatment: achieving high grade purification; |
| ● | Water Conveyance: water transportation and pumping; and |
| ● | Advanced Technologies: commercialization of innovative technologies. |
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OriginClear’s complete line of compact, on-site, point-of-use products include: advanced purification systems that are skid, rack-mounted and containerized for reverse osmosis, ultrafiltration, media filtration, disinfection, water softening, ion exchange and electrodeionization (EDI), combined as needed in small to medium commercial and industrial applications, and custom-build projects. Water conveyance products include pump and lifting stations, modular storage tanks, and control monitoring panels.
OriginClear’s line of modular water products and systems create “instant infrastructure” – fully engineered, prefabricated and prepackaged systems that use durable, sophisticated materials. The units are available in standard capacities for onsite closed-loop systems at commercial business locations.
The company’s rugged wastewater treatment plants, highly reliable pump stations, and premium water purification units typically offer 25 percent lower initial costs over conventional systems, with greater quality and full connectivity. These pump stations and wastewater treatment products utilize high density thermo-plastics (HDPE) and proprietary, innovative prefabrication methods and materials that deliver the longest life and strongest products.
Breakthrough Technologies
OriginClear has a long history of innovation through its OriginClear Technologies division, which is responsible for identifying leading-edge technologies to solve today’s toughest challenges. These advanced technologies are the centerpiece of the division’s international licensee network. The technologies are developed in OriginClear Technologies, and licensees integrate them into their own products.
Electro Water Separation™ (EWS) and Advanced Oxidation (AOx™) are the principal, well-proven technologies.
EWS is OriginClear’s breakthrough water cleanup technology which utilizes a catalytic process to concentrate and eliminate suspended solids in the worst commercial and industrial wastewater.
AOx is OriginClear’s proprietary advanced oxidation technology which generates a dense cloud of ozone, hydrogen peroxide and hydroxyl radicals, dramatically reducing or eliminating dissolved organic microtoxins, including bacteria and viruses, hormones, drugs, pesticides such as Roundup, and synthetics. AOx has also been shown to effectively reduce harmful chemicals such as ammonia and hydrogen sulfide – the “rotten egg” smell in crude oil that reduces its value.
Through international licensing and partnerships, OriginClear’s advanced technologies are being adopted to treat tough water problems in East and South Asia, Europe and the Middle East, and North America.
Market Opportunity
Only 20 percent of all sewage, and 30 percent of all industrial waste, are ever treated. Water leakage results in the loss of 35 percent of all clean water across the planet; cutting that number in half would provide clean water for 100 million people. This is a situation of great danger, but also great potential.
We believe businesses can no longer rely on giant, centralized water utilities to meet the challenge. That is why more and more business users are doing their own water treatment and recycling. Whether by choice or necessity, those businesses that invest in onsite water systems gain a tangible asset on their business and real estate, and can enjoy better water quality at a lower cost.
We believe self-reliant businesses are quietly building Decentralized Water Wealth™ for themselves while also helping their communities. They know that environmental, social and governance (ESG) investing guidelines, which drive about a quarter of all professionally managed assets around the world, specifically include the key factor of how well corporations manage water.
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10,000 Gallon per Day Industrial Membrane Bioreactor Waste Water Treatment Plant designed by Daniel M. Early, PE, using long-lived Structural Reinforced ThermoPlastic (SRTP)
OriginClear enables ESG water management for corporations that are increasingly responsible for what was once delegated to central utilities. For example, when a corporation manages its own water, and uses OriginClear’s proprietary hybrid treatment methods, it can significantly reduce both water use and nutrient footprints (carbon, nitrogen, and phosphorus) in one compact package.
These hybrid processes feature advanced blackwater treatment with advanced clean water processing. They can convert toxic nutrients to less harmful compounds, and even capture them for beneficial reuse purposes, as shown in OriginClear’s recent case study.
Integration of Operating Divisions
Since OriginClear acquired it in 2015, Progressive Water Treatment has evolved into the Fabrication and Manufacturing Division for the whole company. The team at Modular Water Systems, headed by Chief Engineer Daniel M. Early, is responsible for overall design and high-level engineering, and is fully integrated with PWT. It relies on the Fabrication and Manufacturing Division to add incremental revenue for its modular product line, without requiring large increases in personnel.
OriginClear believes that the combined business unit can develop growing revenues through synergy and ultimately help us to achieve overall profitability. OriginClear also seeks to acquire profitable water companies that can complement the synergy of its existing units and accelerate both revenues and profitability. However, there cannot be any assurance that the Company will be able to acquire such companies. Finally, OriginClear incubates ventures which may have promise, such as Investor Water™ and WaterChain™, both of which are designed to help achieve funding for water treatment and management systems. The success of the acquisitions and incubations are neither guaranteed, nor essential to OriginClear’s continued growth.
Supplier Relationship
PWT has been purchasing equipment from its many suppliers for over twenty years, with potential long-term benefits from the relationships.
MWS is positioned to take advantage of PWT’s supplier relationships, but certain components are unique to MWS’s product line. In particular, SRTP pipe is unique, for which MW has four manufacturers. MWS’s preferred SRTP supplier happens to be 40 miles south of PWT’s facility.
OriginClear intends to bring certain functions, such as roto-molding, in-house.
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CUSTOMERS AND MARKETS
Current water and wastewater treatment infrastructure faces a crisis. The prohibitive cost of repairing buried and ageing infrastructure and the need to decrease energy use and waste in the water industry offers an opportunity for a complete design rethink. New technologies, often utilizing membranes, can decentralize water and wastewater infrastructure while improving water reuse by treating to a high standard at a small scale close to the source of generation. Additionally, new automated analytics offer solutions for these more complex decentralized solutions. (Lux Research: The Future of Decentralized Water, June 28, 2016). PWT has designed and fabricated water treatment systems for over twenty years. Major markets include:
| ● | Potable Water for Small Communities |
| ● | Recirculated and Makeup Boiler and Cooling Tower Water |
| ● | Produced Water & Frac Flowback Water |
| ● | Food and Beverage Feed and Effluent Waters |
| ● | Mining Effluent |
| ● | Ground Water Recovery |
| ● | Agriculture Effluent |
| ● | Environmental Water Treatment for Reuse |
MWS focuses on municipal water conveyance and municipal waste water treatment, describing the water and wastewater treatment market as a pyramid with the major cities at the top, medium size cities stacked below them depending upon size and then the smaller towns, counties, cities, townships, state agencies, federal agencies, private individuals, commercial entities, industrial facilities, agriculture facilities at the base of the pyramid.
We believe there are more opportunities at the base of the pyramid. The base of the pyramid is the decentralized market opportunity now being pursued. Focusing on the base of the pyramid also avoids the very competitive, low-profit and slow-growing market in the big city municipalities.
As stated in the Global Decentralized Packaged/Containerized Water and Wastewater Treatment Systems Market, Forecast to 2023, “The decentralized packaged/containerized water and wastewater treatment systems market, covering end users segments such as municipal, industrial, and commercial. The study forecasts the global market revenue to increase from $3.99 billion in 2016 to $6.08 billion in 2023, growing at a compound annual growth rate (CAGR) of 6.2%”.
(https://www.reportbuyer.com/product/4948731/global-decentralized-packaged-containerized-water-and-wastewater-treatment-systems-market-forecast-to-2023.html). This is the market for MWS-engineered products and infrastructure solutions. As civil infrastructure ages and fails and as the costs for new and replacement infrastructure increase year over year, we believe engineers and end-users will search for new ways and methods of deploying water and wastewater systems that are less expensive to deliver and much less expensive to own and operate with the mission intent of substantially increasing the replacement intervals currently experienced by conventional materials of construction and conventional product delivery models.
SALES AND MARKETING
PWT’s sales strategy differs from MWS’s efforts. PWT sales are very dependent upon relationships with past end-use customers and certain manufacturers’ representatives who have relationships with their regional end use customers. On the other hand, MWS’s sales strategy is based on developing relationships with consulting engineers and general contractors as opposed to end-use customers.
As MWS sales strategies develop, PWT believes it will gain recognition with various consulting engineers and general contractors. PWT and MWS are currently developing a stronger national representatives’ network to take advantage of the relationship the sales representatives have gained with engineers, contractors and end use customers.
Now operating as one integrated unit, PWT and MWS have substantial experience in the water & wastewater market and as well as: conventional technologies and their limitations, new technologies, the size and demand of the market and how products are specified and implemented. They also have a strong customer focus throughout the organization to discover and diagnose the customer needs, design and deliver comprehensive solutions.
We believe the keys to capitalizing on the market are visibility, relationships, market understanding, and direct access to the opportunities. Strong marketing programs are also essential, and include: websites with solutions & credibility, sales support tools like literature & webinars and trade show presence.
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Water industry projects move slowly. Most product lines for each of PWT and MWS are considered “pipeline” products, and have a gestational period of 6 months to 3 years. We believe the best strategy to increase the pipeline of opportunities is to have more sales reps with relationships with engineers, contractors and end users.
Competition
PWT shares the market with a large number of suppliers which also provide system integration using multiple technologies. These include California’s PureAqua, Florida’s Harn RO, and Illinois’ Membrane Specialists. We believe PWT’s market share differs from those competitors in areas such as regional focus, customer loyalty, market focus, limited sales representation and other. For instance, 80%+ of PureAqua’s business in the Middle East, Harn RO focuses on drinking water systems for medium to large cities in the SE, Membrane Specialist focuses on tubular membranes and many more examples.
The Company is not aware of any direct competitors to MWS that are building complete water, wastewater treatment systems, and pump stations utilizing SRTP type materials. There are several manufacturers which build metal prepackaged systems, such as Georgia’s AdEdge; however, such companies do not offer the range of hybrid treatment processes available through MWS. The major indirect competition continues to be custom designed and on-site constructed concrete & steel systems. Some fiberglass is used but is very difficult to detail, is brittle and again, has a limited life compared to SRTP systems.
While manufacturers of SRTP pipe could be competitors, none of MWS’s suppliers, other than Contech, for a short period of time, has or intends to sell comparable systems to MWS’s. Their focus is simply to sell miles of pipe.
In April 2019, an SRTP manufacturer approached MWS with the intention of referring product inquiries for the systems MWS builds from its pipe material. The Company intends to continue such synergies.
Growth Opportunities
National Sales Rep Network
In the first quarter of 2019, the Company worked to help PWT and MWS identify seasoned sales representatives across the country through recommendations from those with deep industry knowledge. Those particular representatives were contacted and meetings set to discuss the mutual opportunity. On February 5, 2019, the Company reported on initial positive results.
By early June of 2019, seven additional organizations had signed agreements, building on the eight that PWT and MWS had in place at the beginning of 2019. These additional organizations cover twenty-two additional states with about thirty new representatives. Training has been completed and new potential projects have been presented to PWT and MWS.
Additional sales managers, engineers and project managers will be needed for both PWT and MWS with additional production facilities necessary for PWT. The process of hiring additional personnel and obtaining additional facilities is underway.
Domestic versus International
The market opportunity for each of PWT and MWS is not limited to the United States. The US only represents 5% of the world’s population. In addition, a great deal of that population resides in undeveloped regions or regions with poor treatment systems. We believe implementing MWS’s and PWT’s decentralized technology throughout the world with joint ventures has the potential to have a significant effect on our revenue growth.
Standardization
MWS is developing standardized designs and commoditized product engineering (eliminating the custom consulting engineering work reduces overall project costs), the goal being to design a single product once and use said design as a blueprint for future products. Our goal is to continue driving the standardization and completion of each product’s engineer technical package, using computer design algorithms and standard design approaches, so that engineering costs may potentially decrease to less than 1% for each unit sold, with a long-term goal of less than 0.1%.
Sharing Technology & Projects
PWT’s systems remove suspended solids, oils, metals, and dissolved chemicals & salts. MWS’s focus is on the removal of organic contaminants. It is not uncommon for a waste stream of water to be contaminated with both inorganics and organics, for example, many current animal farms with large amounts of waste effluent that currently is pumped to lagoons that are no longer meeting environmental standards. In the alternative, the water can be treated in-line with MWS products to remove the organics, then PWT’s systems used to remove dissolved inorganics to create water suitable for irrigation or drinking water for the animals. In addition, OriginClear’s proprietary technologies have been shown to successfully treat problems such as animal farm effluents.
By combining these technologies, including OriginClear’s proprietary technology as it matures, the offering to customers becomes stronger and more effective. And both companies benefit from a new opportunity.
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More Specific Opportunities for PWT
We are interested in exploring the following opportunities, but we have no timeline for their implementation:
| ● | Build and promote a fleet of rental treatment systems mounted on trailers or containers. It is very common for a rental to be purchased outright. As a result, PWT’s rental fleet must be continuously replenished. |
| ● | Develop a standard digital product line through 3-D CAD programs and market it as virtual inventory, with components on hand and engineering already done. |
| ● | Expand production capabilities with new equipment that would lower the labor cost of production. For instance, acquire tooling that would minimize the hand tool labor. |
| ● | Develop more services business such as membrane cleaning or resin regeneration. |
More Specific Opportunities for MWS
MWS has developed a grey/black water treatment system for forward operating basis called Expeditionary Wastewater Recycling Systems (EWRS): Patent pending, US Army Human Health Command approved, fully automated, certified wastewater recycling solution which can be sold to all DOD divisions, FEMA and NGOs.
Another new product still being incubated is building manholes utilizing SRTP versus the current precast concrete approach.
ORGANIZATION
MWS is now fully integrated with PWT. MWS personnel are primarily located in New Castle, VA remote locations.
OriginClear supports the combined Texas organization with various administrative, accounting and marketing functions, from virtual locations in Los Angeles and Florida.
FACILITIES AND EQUIPMENT
Manufacturing
PWT currently leases its facility. The facility is located at 2535 E. University Drive, McKinney, Texas 75069. There are five buildings totaling 12,400 square feet on the 1.7 acres of land. There is additional expansion space for several more assembly buildings when and if needed.
PWT’s in-house engineers and designers utilize modern 3-D CAD programs to design all of the systems sold by PWT. They also design, program and build all of the control systems and the Internet-connected Process Logic Control (PLC) video screen interfaces.
PWT in-house craftsmen complete the metal and plastic machining, welding and assembly of PWT’s and MWS’s systems.
MWS engineering resources are provided both internally and externally. Daniel Early leads the engineering program and relies on support from pre-sales engineer, Robb Litos, and PWT to assist with Manufacturing Engineering. MWS subcontracts engineering support to PWT, which employs its own established and experienced engineering team. MWS also subcontracts 2D and 3D engineering design work to outside vendors to assist in the development of standardized drawings and proposals.
MWS’s specialized manufacturing is outsourced at present. PWT provides substantial critical manufacturing support to MWS; this support takes the form of various sub assembly fabrication (membrane modules, equipment skids, MWS equipment buildings, etc.). PWT is the sole source provider for MWS’s integrated control panels. In addition to PWT, heavy plastic and or custom plastic manufacturing is provided by a company in Roanoke, Virginia and another in Ontario, Canada. Additional sub-contract manufacturing is available through fabricators in Hopkins, MO, Corsicana, TX, and Vernon Hills, IL.
The Company plans to transition the plastic fabrication of MWS’s pump stations and wastewater treatment systems to PWT from subcontractors. There is no timeline for this, as it will require an additional 2,400 to 3,000 square foot building for assembly, engineers and project managers.
The components such as pumps, membranes and instruments will be acquired either through PWT’s or MWS’s normal vendors. The large diameter SRTP pipe will be acquired from the fabricator located about 40 miles south of Dallas.
The building blocks of all systems are metal reinforced or structural profile wall reinforced thermoplastics pipe (SRTP) available from one of over a half dozen pipe suppliers. Being pipes they are manufactured to be sold into high volume applications and are very economical for MWS’s high value applications. MWS purchases these plastic cylinders up to 11’ in diameter and are utilized as the vessel or housing part of the water treatment systems.
More efficient fabrication and assembly equipment are available at relatively little cost to expedite the fabrication time and improve the quality. Some of that equipment includes: CNC waterjet, large diameter core drills, fusion welders and roto molders.
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Technology Licensing Division
For its first eight years of operations, OriginClear focused on development and commercialization of its Electro Water Separation™ technology. In 2015, the technology went into commercial phase, and the Company launched it as OriginClear Technologies. The mission of OriginClear Technologies is to develop Electro Water Separation™ and achieve its full recognition as an international industry standard in treating our increasingly complex wastewater treatment challenges. For this purpose, OriginClear Technologies relies on an ongoing strong R&D and engineering activity for the development of its technology, while actively building its network of partners, licensees and joint venture partners for commercial development. The Company had established OriginClear (HK) as its wholly-owned subsidiary in Hong Kong to manage Asia-Pacific market development, but beginning on January 22, 2020, the Company named India’s Permionics as its Strategic Partner for Asia-Pacific Region in an expansion of the existing licensing partnership intended to better address regional opportunities. Permionics is also a key channel partner for PWT. The Company believes this is a more productive way to access the region, and it is in the process of closing OriginClear (HK); OriginClear continues to manage China opportunities from the United States.
While OriginClear Technologies focuses on developing and monetizing the Company’s internally-developed intellectual property, best practices and trade secrets, it is expected to do the same for technologies which may come in the future with the Group’s acquisition of profitable water treatment companies.
The Technology
OriginClear is the proprietary developer of EWS, the high-speed, primarily chemical-free technology to clean up large quantities of water. It removes oils, suspended solids, certain dissolved solids, and pathogens, in a continuous and energy-efficient process. The Company originally developed this technology to solve the challenge of removing microalgae from a highly dilute state. We believe EWS technology remains the most efficient non-chemical, continuous mechanism for the concentration of live algae cells from water.
The electro-chemical process was then extended, first to cleaning up oil and gas waste water and most recently, to industrial, agricultural and urban effluents. These water treatment applications are entirely electrochemical in nature and do not rely on algae for its cleaning capabilities, which is a separate application of the technology. EWS is designed to be an early step in removal of oils, solids and pathogens; reducing the work that more expensive, downstream processes such as Ultra Filtration or Reverse Osmosis must do, therefore enabling more cost-efficient and high-volume water cleanup overall.
In March of 2016, OriginClear announced that it had successfully developed and proved Advanced Oxidation for its breakthrough water cleanup system, EWS. University laboratory tests have shown that EWS with Advanced Oxidation (EWS:AOx™) can now extract dissolved contaminants, which are otherwise difficult to remove without chemicals such as chlorine. Overall, the system has shown a dramatic reduction in Total Organic Compounds which includes all forms of organic contamination, solids, miscible or dissolved, to meet new stringent global discharge requirements.
Today, we are capable of pairing the two technologies as EWS:AOx™, or separately, as the application requires. OriginClear believes that its technology is valuable to the industry because it has the potential to greatly extend the life of membranes and filters by effectively treating very dirty, oily water, while reducing chemical use significantly.
OriginClear also believes that its Advanced Oxidation technology will help neutralize harmful micro-contaminants, such as industrial solvents, which is difficult or impossible to achieve with other technologies.
Overall, the system has shown a dramatic reduction in Total Organic Compounds which includes all forms of organic contamination, solids, miscible or dissolved, to meet new stringent global discharge requirements.
Technology Division Milestones
On December 5, 2019, OriginClear announced that its Spanish partner Depuporc unveiled an integrated manure treatment system using OriginClear technology. The demonstration system processes 30 metric tons per day, with client-validated reduction of contaminants.
On January 22, 2020, OriginClear named India’s Permionics as Strategic Partner for Asia-Pacific Region in an expansion of the existing licensing partnership intended to better address regional opportunities. Permionics is also a key channel partner for PWT.
The OriginClear Group
The OriginClear Group’s strategy is to grow incrementally by focusing on the water treatment services market, acquiring the hands-on service suppliers in this market. It intends to develop a network of these wholly-owned water treatment companies to meet the needs of end users from all industries with a full range of treatment technologies. Due to increased regulation, water treatment recycling challenges and a need to focus on their own core business, many water users today are outsourcing their water treatment needs to outside experts. In addition, we have identified a major trend in decentralization of water treatment, which we believe will cause small water service companies to grow. There will be significant synergies within the Group as technology, manufacturing expertise, market knowledge, projects and opportunities are shared. The target acquisitions must be accretive in nature with solid sales growth and profitability. The acquired companies must have a solid management team to accelerate their previous growth with excellent customer service. Initially, the acquisition focus is in the U.S. but will be expanded internationally in a few years.
The Company believes that the policy of building business units from internal cash flow can be productive. It did so with the Daniel Early/MWS project, and has embarked on a similar incubation with the Investor Water project.
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OriginClear Technologies
We are licensors of our technology. We grant non-exclusive licenses to OEMs (Original Equipment Manufacturers), and participate in joint ventures, contributing our technology and our commitment to each joint venture’s business focus. Once we have completed transitioning away from our in-country presence in China, we will have no master licensees.
Technology Applications
| 1. | Algae Harvesting |
Algae is one of nature′s most efficient and versatile photosynthetic factories. It has a short growing cycle and does not require arable land or fresh water, which makes it very attractive as an energy feedstock, or as a healthy and natural feed or fertilizer. But a major barrier to commercialization is the difficulty in extracting small amounts of algae biomass from very large quantities of water at a reasonable cost and without using more energy than can be created. And the quantities of water required can be very large indeed: algae-to-water ratio can be as high as 1-to-1000. Conventional water separation technologies such as centrifuges and membranes may work on a limited basis, but can be too expensive for large-scale use. Additionally, centrifuges are typically a batch process.
Algae harvesting is OriginClear’s historical activity, which also laid the technology groundwork for the company’s subsequent applications development. It started with Single Step Extraction™ (SSE). Today, SSE is the first stage in EWS and it powers our sanitation and growth optimizing applications.
Algae for Soil Enrichment
In 2015, OriginClear began developing the use of algae for soil enrichment with partner AlgEternal Technologies, a vertically-integrated producer of non-fuel high value products from microalgae.
On April 26, 2018 the Company finalized a formal licensing agreement with AlgEternal, capping five years of continuous operation of OriginClear’s first-generation Smart Algae Harvester™ at AlgEternal’s LaGrange, Texas headquarters. Following exhaustive testing, AlgEternal first selected OriginClear’s EWS technology in 2013. In 2015, AlgEternal found that by using OriginClear’s technology to harvest pure algae, conventional fertilizer costs could be reduced by up to 40 percent.
In February 2018, a Texas A&M team studied the effectiveness of Agtivate™ in rice production, showing that yields could be increased by 500 to 900 lbs per acre, while reducing standard nitrogen up to 75%, when using Agtivate. We believe that these test results demonstrated that OriginClear’s line of Smart Algae Harvesters is highly efficient, effectively controls bacteria in the algal paste product to facilitate a long shelf life, and, uniquely, ensures the algae cells are alive after harvesting.
In 2016, the FREEWATERBOX® developed by OriginClear joint venture Ennesys completed a field pilot in Dubai. It is based on the use of micro-algae for the removal or biotransformation of pollutants, including nutrients and xenobiotics from wastewater and CO2 from waste air, while producing a soil conditioner for the enhancement and protection of agricultural crops. Ennesys is still working to achieve a commercial rollout based on this pilot.
| 2. | The Oil and Gas Industry |
The oil and gas industry is one of the most water-intensive industries in the world. It is both a large consumer of fresh water and producer of contaminated water, which is also a potential asset for drought-affected regions. Water is produced and used in large quantities in oil and gas operations. In the United States, an average of 7 barrels of contaminated water is generated for each 1 barrel of oil produced. Greentech Media reports that energy companies pay between $3 to $12 to dispose of each barrel of produced water. We believe OriginClear’s Electro Water Separation™ technology is ideally suited to help clean up the large quantities of water used in oil and gas operations. A 2009 report on modern shale gas by the Groundwater Protection Council, “Modern Shale Gas Development in the United States: A Primer,” stated that “the amount of water needed to drill and fracture a horizontal shale gas well generally ranges from about 2 million to 4 million gallons, depending on the basin and formation characteristics.” While fracking technology promises to unleash an abundant supply of inexpensive natural gas to power the modern world, water is quickly becoming a serious limiting factor. Additionally, the water returns as “frack flowback” laced with petroleum and contaminants that require rapid and efficient removal for disposal and recycling.
Oil and Gas Water Cleanup Solutions
The Company has completed successful trials in the Niobrara gas fields of Colorado, the Permian light crude oil fields of West Texas and the Monterey heavy crude oil fields in California. The Bakersfield testing demonstrated that produced water from heavy oil in California’s Monterey Shale Formation could technically and economically be reprocessed for Cyclic Steam Stimulation in oil wells and agricultural irrigation water. EWS removes up to 99.9% of all free and emulsified oil, and 99.5% of suspended solids from oil & gas wastewater, while also removing certain dissolved contaminants that will co-precipitate, and continuously disinfecting bacteria. In the oil and gas application, OriginClear’s core EWS technology is typically supplemented with ‘heavies’ removal on the front end, intelligent controls, and a final polishing system, for a complete solution.
Through its licensees and joint venture partners, OriginClear is making EWS available, either as a stand-alone solution or integrated with up- and downstream treatment modules, to customers such as: E&P operators, service companies, disposal well operators and water treatment companies.
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At this writing, we are concerned that with prices at record lows, the oil industry will once again retrench, as it did in the last oil price crash. Therefore, we have no expectations of oil and gas applications of our technology in the foreseeable future.
| 3. | Industrial and agricultural Waste Water |
Perhaps the largest of all opportunities for EWS is in cleaning up industrial, agricultural and urban effluents. EWS is an electrically-based technology that can target any application in waste water treatment, with a focus on the “clarity” stage of removing oils, suspended solids and bacteria. EWS technology has been shown to effectively clean organics such as petroleum, achieving up to 99.9% reduction in free oil and a 99.5% reduction in suspended solids, and reduction of up to 99% of bacteria and other invaders, for clean and sanitized effluents. Another EWS prototype has been demonstrated in China for landfill leachate treatment. EWS alone achieved a 75% reduction in leachate’s Chemical Oxygen Demand, a marker of contamination level that includes suspended solids and dissolved contamination as well, and 70% reduction in Ammonia.
The Advanced Oxidation complement to EWS known as EWS:AOx™, announced in March of 2016, shows promise to neutralize micro-contaminants such as ammonia, hydrogen sulfide, and dioxane, an industrial solvent which has been found extensively in aquifers in Southern California and elsewhere. We also believe that EWS:AOx can be valuable in neutralizing many other anthropogenic organic compounds (AOCs), including endocrine disrupting chemicals (EDCs).
Competitors
The Algae Industry
Companies in the new algae fuels industry tend to organize themselves as integrated producers and to keep their intellectual property to themselves. Our strategy, on the other hand, is to share our technology widely through licensing and private labeling. With respect to our algae harvesting and sanitizing applications, we are aware that Alfa Laval, Algix, Aurora Algae, Cavitation Technologies, Evodos, New Oil Resources, Open Algae LLC, Perlemax, Valicor, Smartflow Technologies, Westfalia and World Water Works, among others, offer competing technologies. OriginClear believes there is synergy between its process and many of these competing technologies, where EWS can do the “heavy lifting” as the first, high-speed concentration stage, with other processes offering further concentration.
The Oil and Gas Industry
Market and Trends
The oil and gas industry is a major source of waste water. In the US, it generates about seven barrels of produced water for each barrel of oil. More recently the flowback water from fracking operations is a short term, but intensive, source of waste water as well. Historically the solution to the treatment of produced and frack flowback water has primarily been to dispose it in permitted injection wells. Many technologies have existed for the “filtering” of these waters prior to injection, but with limited ability to remove contaminants. More recently, because of the cost of water management, environmental concerns and regulatory requirements, these “filtering” technologies are being reviewed and new technologies are being developed; the goal being to reduce water management costs and to dramatically reduce the volume of disposal. Not only can the oil and gas industry look forward to reduced water management costs, but environmental impacts will have been reduced; a win-win for all concerned. Accordingly, the industry is increasingly recycling its produced and frack flowback waters for use in water flooding, cyclic steam stimulation, enhanced oil recovery, new hydraulic fracturing operations, irrigation and even drinking water. Recycling is becoming the economic choice as technologies have advanced and the cost of water treatment has decreased; while at the same time, the cost of disposal has risen (according to Shale Play Water Management magazine, costing between $1.75 and $26.75 per barrel of water). In addition, intense lobbying by environmental groups in front-line regions like California and New York is driving treatment and reuse as a way to make fracking and drilling in general more acceptable, especially in the midst of California’s historic drought. Markets-and-markets reports that the global produced water treatment market size is estimated to exceed $8 billion by 2019. The major factors responsible driving the growth of this market include the energy sector growth in Africa and the Middle East, along with increasing strictness of environmental policies. According to Bluefield Research, wastewater treatment spending for hydraulic fracturing is expected to grow almost three-fold, from $138 million in 2014 to $357 million in 2020 in the U.S. Bluefield cites water supplies increasingly at risk, tighter regulations emerging in key states, and costs of disposal on the rise as factors contributing to the substantial rise in water treatment and reuse, which is expected to account for 27 percent of total produced and flowback water by 2020, about double current levels.
Given prices at record lows, we believe the oil industry will once again retrench, as it did in the last oil price crash. Therefore, we have minimal expectations of oil and gas applications of our technology in the foreseeable future.
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Competing Technologies
These “filtering” technologies range from simple decanting to distillation. They are typically implemented as a multi-stage process to attain water quality standards for the planned reuse. EWS can act as a pre-treatment stage for any of these multi-stage processes. While EWS can remove the emulsified and free oil, suspended solids and bacteria from the water stream, these subsequent stages can remove the heavy metals, scaling chemicals, salts and other natural and introduced chemicals. EWS can reduce fouling of these filters and membranes, making subsequent or downstream processes complementary to EWS and creating a strategic opportunity to collaborate. Direct competitors using some form of electro-coagulation technologies include: Halliburton, Watertectonics, Bosque, Ecolotron, Quantum-ionics, Kaselco, Baker Hughes, RecylClean, Axine Water and Ecosphere. Other companies also compete with EWS, but use other technologies that can involve chemical coagulants, batch operation or a high level of consumables. These include: Aqua-Tech, Aqua-Pure, CTI, Purifics, HydroZonics, Myclex, Osmonics, Filterboxx, MECO, Layne, 212 Resources, Veolia, Fountain Quail, Pall and Altela.
The Waste Water Treatment Industry
Waste water is a growing problem as industry, agriculture and communities expand, droughts force the need for reclamation, and aquifers and reservoirs become polluted. Meanwhile, previously lightly-regulated regions of the world are enforcing much stricter environmental regulations. Overall, water security is one of the greatest challenges of our time. According to analysts at McKinsey & Company (Charting our Water Future, November 2009 report), the world will see a 40 percent gap between water supply and demand by 2030. Industrial uses account for a startling amount of water consumed around the world. According to the United Nations (The World Business Council for Sustainable Development, March 2006 report) industry consumes nearly 60 percent of available water in high-income countries. Curbing fresh water consumption at the industrial level has the potential to significantly improve water security worldwide. In general, we believe that OriginClear has one or more advantages over some of the potential competitors, in that our process does not primarily use chemicals, is highly scalable on a continuous flow process, and may be significantly lower in energy consumption. We believe our technology may, in some cases, complement these companies’ offerings, however there is no guarantee that our technology will produce more efficiently or cost-effectively than these other technologies. To our knowledge, there is no company or technology available on the market providing a similar level of synergistic integration of the three processes that we implement under a single configuration: Electro Coagulation, Electro Flotation (these two being combined in our process as EWS) and Advanced Oxidation (AOx).
Taken separately, these processes are marketed as follows:
Electro Coagulation, though being a relatively new technology, has been known and available in the market for approximately 30 years. Companies like Watertectonics, Kaselco, Powel Water or H2O Technologies offer engineered electrocoagulation systems to the market. There are also a number of one-off electrocoagulation systems in operation worldwide. Electro Flotation is an emerging technology that is mostly seen in scientific publications, as an alternative to more conventional Dissolved Air Flotation (DAF) systems. DAF systems are available worldwide from numerous suppliers including but not limited to, Veolia Water, Ecologix, RWL Water, SAWater, WPL International, World Water Works, etc. and almost exclusively rely on massive injection of chemical coagulants for their efficiency. EWS has been designed with versatility in mind. It is equally efficient when used with sacrificial anodes, slowly releasing the anode’s metal ions that will provide the coagulation effect, or with Dynamically Stable Anodes (DSA) that will have a catalytic role on water matrix preparation with or without chemical coagulants. In both cases, the patented reactors design marks a significant evolution in the industry, featuring an enhanced mixing function, a better mass transfer and an easier maintenance and replacement when using sacrificial anodes.
Advanced Oxidation, not unlike Electro Coagulation, has been known to scientists for approximately 40 years. However, the few Advanced Oxidation technologies being commercially in use mostly rely on catalyst injection and/or on a combination of catalysts and UV irradiation for their process. They are not as streamlined as EWS:AOx, which is solely an electrochemical process, and these processes require extensive preparation of the water matrix to be efficient. MIOX, Blue Earth Labs are marketing similar systems for niche applications, without offering the additional suspended solids removal functions featured by EWS. Other identified competitors are Lenntech, SSWM, Esco International, and Spartan Water Treatment. Here again, OriginClear’s reactors’ specific design is a major evolution. Contact area, mass transfer, high turbulence caused by shear stress all help in enhancing oxidation reactions and, furthermore, the two variations of the tubular reactor design respectively have a major role in direct oxidation, mostly targeting “Hard COD”, contaminants that are known for being difficult to degrade, and, additionally, indirect oxidation, widely used for less difficult reactions.
In summary, while competitors exist for each of the three phases of our technology, we have not detected any that does all three in one synergistic system.
Government and Environmental Regulation
We are not aware of any existing or probable government regulations that would negatively impact on our operations. As a licensor and/or provider of water treatment equipment, we are not subject to government regulations for the removal of oils, solids and pathogens from water, other than normal safety standards and certifications (such as UL or CE) for goods that we manufacture for demonstrations and joint ventures, and our product lines. However, our prospective customers are subject to local, state and federal laws and regulations governing environmental quality and pollution control. To date, our compliance with government regulations has had no material effect on our operations, capital, earnings, or competitive position, and the cost of such compliance has not been material. We are unable to assess or predict at this time what effect additional regulations or legislation could have on our activities.
Intellectual Property
OriginClear’s Intellectual Property (“IP”) portfolio has been in continuous development since 2008. Early patents focused on algae harvesting. Beginning in 2015, the company applied this knowledge to water treatment and began development of EWS.
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In 2018, OriginClear reorganized its intellectual property portfolio to focus exclusively on its electrochemical water treatment solution, Electro Water Separation™ (EWS) with Advanced Oxidation (AOx™).
On May 25, 2019, in its Annual Report for the fiscal year ended December 31, 2018, the Company stated, “we have chosen to protect certain intellectual property with trade secrets rather than patents”. In the intervening year, the Company has extended this policy to its entire portfolio, having concluded that sharing inventions at this time through the patent process equates, over time, to giving up that technology.
Accordingly, OriginClear no longer actively maintains its patent applications and patents, willingly deeding them to the water industry as an open resource. The Company intends to reserve to itself and its partners the protected communication of further discoveries and trade secrets relative to the EWS and AOx technology domains.
The company continues to further improve and expand its technology’s scope, efficiency and reliability.
Trademarks:
| ● | On April 2, 2015, we filed a trademark application with the USPTO to protect the intellectual property rights for our wordmark “OriginClear”. On August 16, 2016 the wordmark was registered with Registration Number 5023444. The registration is current. |
| ● | On April 8, 2015, we filed a trademark application with the USPTO to protect the intellectual property rights for our current company logo “OriginClear” with the stylized “O”. On August 16, 2016 the mark was registered with Registration Number 5027992. The registration is current. |
Licensed Patents:
On June 25, 2018, Daniel Early granted us a worldwide, exclusive non-transferable license to intellectual property consisting of five issued US patents, and design software, CAD, marketing, design and specification documents. See “Products, Technology and Services—Patents”
Marketing Agreements:
In an Amendment dated December 2, 2019, the Company renewed the licensing agreement of Zaragoza, Spain-based Depuporc S.A. for an additional ten years, and agreed to remarket its DEPUPORC® brand animal manure treatment system worldwide, both directly and through channel partners, excluding geographical Europe and Europe-based customers. DEPUPORC, which integrates OriginClear technology under license, is protected by Spanish patent 2011311192 granted on December 12, 2013 with priority given on July 13, 2014 to MONTAJES LONGARES SL, the parent company of Depuporc.
Depuporc S.A. states that DEPUPORC is recognized by the Institute of Environmental Management of the Spanish Province of Aragon as a method of treatment and purification of liquid manure generated in pig farms in order to reduce nitrogen emissions linked to animal husbandry. DEPUPORC, likewise, has been recognized and selected by Spain’s Ministry of Agriculture, Food and Environment for CARBON FES-CO2 as a PILOT CLIMATE PROJECT in its 2012 program.
Abandonments and Transfers
Abandonment generally occurs when the Company believes it has better intellectual property in other applications, or when we have chosen to protect the IP with trade secrets instead of patents. None of the following abandoned or transferred patents are required for our business or products, and our policy going forward is to preserve our evolving knowhow through trade secrets.
On November 11, 2011, we filed a trademark application with the USPTO to protect the intellectual property rights for our prior company logo “O”. On February 11, 2013 the trademark was issued with Certificate Number 4,284,801. The logo is obsolete.
On November 11, 2011, we filed a trademark application with the USPTO to protect the intellectual property rights for our prior company mark “OriginOil”. On February 11, 2013 the trademark was issued with Certificate Number 4,284,800. The mark is obsolete.
In 2008, we abandoned the pursuit of two provisional patent filings filed in relating to “In-Line Lysing And Extraction System for Microorganisms” and “Renewable Carbon Sequestering Method of Producing Pollution Free Electricity”.
In 2009, we abandoned the pursuit of a provisional patent related to “Modular Portable Photobioreactor System”.
In 2010, we abandoned the pursuit of utility patent application related to “Device and Method for Separation, Cell Lysing and Flocculation of Algae from Water” and provisional patent application “Methods and Apparatus for Growing Algae on a Solid Surface”.
In 2011, we abandoned the pursuit of provisional patent application related to “Algae Growth Lighting and Control System”.
In 2012, we abandoned the pursuit of provisional patent filings related to “Multi-Plane Growth Apparatus and Method”, “Systems and Methods for Monitoring and Controlling Algae Growth and Harvesting Cellular Mass and Intracellular Products”, “Method for Extracting Intracellular Products from Microorganisms Using Gas Embolism”, “Algae Harvest Appliance”, “A System, Method And Apparatus To Produce Dewatered And Densified Algae Biomass” and foreign rights for “Bio-Energy Reactor”.
In 2013, we transferred the rights to “Bio Energy Reactor” (Application # US 2011-0308962 A1), “Algae Growth System for Oil Production” (Application # US8993314B2, issued to patent 8,993,314) and “Apparatus and Method for Optimizing Photosynthetic Growth in a Photo Bioreactor” (Application # US20090291485) to our partner Ennesys in France in return for equity. We reported the transfer on October 22, 2013 (http://bit.ly/ennesyspatents).
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In 2015, we abandoned the pursuit of Australian patent application only, for “Systems and Methods for Harvesting and Dewatering Algae”.
In 2016, we abandoned the pursuit of provisional patent filings related to “Systems, Methods and Apparatuses for Dewatering, Flocculating and Harvesting Algae Cells”, “Monitoring Systems for Biomass Processing Systems”, “Increasing Contact Between Solutes and Solvents in an Aqueous Medium”, “Systems and Methods for Increasing Growth of Biomass Feedstocks”, and “Harvesting and Dewatering Algae Using a Two-Stage Process”.
In 2018, we abandoned the pursuit of the utility patent application related to “Removing Ammonia from Water” and abandoned the US patent “Systems and Methods for Extracting Non-Polar Lipids from an Aqueous Algae Slurry and Lipids Produced Therefrom”.
In 2019, we abandoned the pursuit of patent and PCT applications with the EPO and USPTO related to “Removing Compounds from Water Using a Series of Reactor Tubes Containing Cathodes Comprised of a Mixed Metal Oxide”, “System for removal of suspended solids and disinfection of water”, “Method for Treating Wastewater”, “Producing Algae Biomass Having Reduced Concentration of Contaminants”, “Systems and methods for reduction of total organic compounds in wastewater”, “Advanced Oxidation Water Treatment Modules”, “Producing Algae Biomass, Decontaminating Wastewater Utilizing a Series of Reactor Tubes with Mixed Metal Oxide Electrodes”, and the patent, Systems and Methods for Harvesting and Dewatering Algae, in favor of trade secrets.
Previously, we stated “The company is preparing an updated utility patent application to be filed in the near future” for “Electrochemical Systems and Methods for Peroxide Production in Water Treatment”. In accordance with our reiterated policy to focus on trade secrets, we do not intend to pursue this filing.
Research and Development
During the years ended December 31, 2019 and 2018, we invested $107,351and $290,542, respectively, on research and development of our technologies. Research and development costs include activities related to development and innovations in the core EWS/AOx technology, fabrication and scale-up of products based on this technology, development of firmware and process automation, development of new applications in industries such as aquaculture, technical support of customers, agents, joint venture partners and licensees, on-site consulting and training activities, and miscellaneous research.
Employees
As of December 31, 2019, we had 24 employees, all of whom are full-time.
OUR PROPERTY
Our principal offices are located at 2535 E. University Drive, McKinney, TX 75069. We are co-located with PWT, our Dallas based subsidiary, which rents the approximately-12,000 square foot facility, with a current monthly rent of $4,850.
We maintain an address for banking and shareholder support at 355 South Grand Avenue, Suite 2450 PMB #1051, Los Angeles, California 90071.
Currently, 9 employees also work from remote locations in Los Angeles, California; Pittsburgh, Pennsylvania; New Castle, Virginia; and Sarasota, Florida.
We believe these facilities are suitable and adequate to meet our current business requirements.
Risks Relating to Our Business
We have not been profitable.
We were formed in June 2007 and are currently developing a new technology that has not yet gained market acceptance. Since we have not been profitable, there are substantial risks, uncertainties, expenses and difficulties that we are subject to. To address these risks and uncertainties, we must do among the following:
| ● | Successfully execute our business strategy; | |
| ● | Respond to competitive developments; and | |
| ● | Attract, integrate, retain and motivate qualified personnel. |
There can be no assurance we will operate profitably or that we will have adequate working capital to meet our obligations as they become due. Investors must consider the risks and difficulties frequently encountered by early stage companies, particularly in rapidly evolving markets. We cannot be certain that our business strategy will be successful or that we will successfully address these risks. In the event that we do not successfully address these risks, our business, prospects, financial condition, and results of operations could be materially and adversely affected.
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We have a history of losses and can provide no assurance of our future operating results.
We have experienced net losses and negative cash flows from operating activities since inception and we expect such losses and negative cash flows to continue in the foreseeable future. As of December 31, 2019 and 2018, we had working capital (deficit) of $(38,598,414) and $(12,888,290), respectively, and shareholders’ (deficit) of $(42,361,876) and $(16,624,530), respectively. For the years ended December 31, 2019 and 2018, we incurred net losses of $(27,473,678) and $(11,346,569). As of December 31, 2019, we had an aggregate accumulated deficit of $(107,281,659). We may never achieve profitability. The opinion of our independent registered public accountants on our audited financial statements as of and for the year ended December 31, 2019 contains an explanatory paragraph regarding substantial doubt about our ability to continue as a going concern. Our ability to continue as a going concern is dependent upon raising capital from financing transactions and future sales.
We will need significant additional capital, which we may be unable to obtain.
Revenues generated from our operations are not presently sufficient to sustain our operations. Therefore, we will need to raise additional capital to continue our operations. There can be no assurance that additional funds will be available when needed from any source or, if available, will be available on terms that are acceptable to us. We may be required to pursue sources of additional capital through various means, including debt or equity financings. Future financings through equity investments are likely to be dilutive to existing stockholders. Also, the terms of securities we may issue in future capital transactions may be more favorable for new investors. Newly issued securities may include preferences, superior voting rights, the issuance of warrants or other derivative securities, and the issuances of incentive awards under equity employee incentive plans, which may have additional dilutive effects. Further, we may incur substantial costs in pursuing future capital and/or financing, including investment banking fees, legal fees, accounting fees, printing and distribution expenses and other costs. We may also be required to recognize non-cash expenses in connection with certain securities we may issue, such as convertible notes and warrants, which will adversely impact our financial condition. Our ability to obtain needed financing may be impaired by such factors as the capital markets and our history of losses, which could impact the availability or cost of future financings. If the amount of capital we are able to raise from financing activities, together with our revenues from operations, is not sufficient to satisfy our capital needs, even to the extent that we reduce our operations accordingly, we may be required to cease operations.
We have incurred substantial indebtedness.
As of December 31, 2019, we had outstanding convertible promissory notes in the amount of $3,432,300. All such debt is payable within the following twelve to thirty-six months and is convertible at a significant discount to our market price of stock. Our level of indebtedness and insufficient cash on hand increases the possibility that we may be unable to generate cash sufficient to pay, when due, the principal of, interest on or other amounts due in respect of the indebtedness. Our indebtedness, combined with other financial obligations and contractual commitments, could:
| ● | in the case of convertible debt that is converted into equity, result in a reduction in the overall percentage holdings of our stockholders, put downward pressure on the market price of our common stock, result in adjustments to conversion and exercise prices of outstanding notes and warrants and obligate us to issue additional shares of common stock to certain of our stockholders; | |
| ● | make it more difficult for us to satisfy our obligations with respect to the indebtedness and any failure to comply with the obligations under any of our debt instruments, including restrictive covenants, could result in events of default under the loan agreements and instruments governing the indebtedness; | |
| ● | require us to dedicate a substantial portion of our cash flow from operations to payments on indebtedness, thereby reducing funds available for working capital, capital expenditures, acquisitions, research and development and other corporate purposes; | |
| ● | increase our vulnerability to adverse economic and industry conditions, which could place us at a competitive disadvantage compared to competitors that have relatively less indebtedness; |
| ● | limit our flexibility in planning for, or reacting to, changes in business and the industry in which we operate; and | |
| ● | limit our ability to borrow additional funds, or to dispose of assets to raise funds, if needed, for working capital, capital expenditures, acquisitions, research and development and other corporate purposes. |
We may incur significant additional indebtedness in the future. If we incur a substantial amount of additional indebtedness, the related risks that we face could become more significant. Additionally, the terms of any future debt that we may incur may impose requirements or restrictions that further affect our financial and operating flexibility or subject us to other events of default.
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Our revenues are dependent upon acceptance of our technology and products by the market; the failure of which would cause us to curtail or cease operations.
We believe that most of our future revenues will come from the sale or license of our technology and systems. As a result, we will continue to incur substantial operating losses until such time as we are able to generate revenues from the sale or license of our technology and systems. There can be no assurance that businesses and prospective customers will adopt our technology and systems, or that businesses and prospective customers will agree to pay for or license our technology and systems. In the event that we are not able to develop a customer base that purchases or licenses our technology and systems, or if we are unable to charge the necessary prices or license fees, our financial condition and results of operations will be materially and adversely affected.
We will need to increase the size of our organization, and may experience difficulties in managing growth.
We are a small company with a minimal number of employees. With the start of our planned principal activities, we expect to experience a period of significant expansion in headcount, facilities, infrastructure and overhead and anticipate that further expansion will be required to address potential growth and market opportunities. Future growth will impose significant added responsibilities on members of management, including the need to identify, recruit, maintain and integrate managers. Our future financial performance and our ability to compete effectively will depend, in part, on our ability to manage any future growth effectively.
We may not be able to successfully develop and commercialize our technology and systems which would result in continued losses and may require us to curtail or cease operations.
We are currently commercializing our technology. We are unable to project when we will achieve profitability, if at all. As is the case with any new technology, we expect the research and development process to continue. We cannot assure that our engineering resources will be able to develop our technology and systems fast enough to meet market requirements. We can also not assure that our technology and systems will gain market acceptance and that we will be able to successfully commercialize the technologies. The failure to successfully develop and commercialize the technologies would result in continued losses and may require us to curtail or cease operations.
Our ability to clean-up oil and gas and waste water and aqua-feed on a commercially viable basis is unproven, which could have a detrimental effect on our ability to generate or sustain revenues.
The technologies we use to harvest algae, clean up oil and gas water, and waste water, have never been utilized on a full-scale commercial basis. Our EWS:AOx™ technology was only recently developed. All of the tests conducted to date by us with respect to the technology have been performed in a limited scale or small commercial scale environment and the same or similar results may not be obtainable at competitive costs on a large-scale commercial basis. We have never employed our technology under the conditions or in the volumes that will be required for us to be profitable and cannot predict all of the difficulties that may arise. Accordingly, our technology may not perform successfully on a commercial basis and may never generate any revenues or be profitable.
If a competitor were to achieve a technological breakthrough, our operations and business could be negatively impacted.
There currently exist a number of businesses that are pursuing novel processes to harvest algae, clean up oil and gas water, and waste water. Should a competitor achieve a research and development, technological or biological breakthrough where process costs are significantly reduced, efficiency greatly increased over ours, or if the costs of similar competing products were to fall substantially, we may have difficulty attracting customer licensees or sales. In addition, competition from other technologies considered “green” (environmental) or “blue” (water technology) could lessen the demand for the end-products produced by our technology. Furthermore, competitors may have access to larger resources (capital or otherwise) that provide them with an advantage in the marketplace, which could result in a negative impact on our business.
Any competing technology that harvests algae, cleans up oil and gas water, and waste water, at a superior scale and more cost efficient than ours, could render our technology obsolete. In addition, because we only hold five issued patents, we may not be able to preclude development of even directly competing technologies using the same methods, materials and procedures as we use to achieve our results. Any of these competitive forces may inhibit or materially adversely affect our ability to attract customer licensees, or to obtain royalties or other fees from our customer licensees. This could have a material adverse effect on our business, prospects, results of operation and financial condition.
Our long-term success depends on future royalties paid to us by licensees, and we face the risks inherent in a royalty-based business model.
We intend to generate revenue through the licensing of our technology and systems, and our long-term success depends on future royalties paid to us by prospective customer licensees. The amount of royalty payments we may receive is expected to be based upon the revenues generated by our prospective customer licensees’ operations, and so we will be dependent on the successful operations of our prospective customer licensees for a significant portion of our revenues. We face risks inherent in a royalty-based business model, many of which are outside of our control, including those arising from our reliance on the management and operating capabilities of our customer licensees and the cyclicality of supply and demand for end-products produced using our technology. Should our prospective customer licensees fail to achieve sufficient profitability in their operations, our royalty payments would be diminished and our results of operations, cash flows and financial condition could be adversely affected, and any such effects could be material.
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We rely on strategic partners.
We rely on strategic partners to aid in the development and marketing of our technology and processes. Should our strategic partners not regard us as significant to their own businesses, they could reduce their commitment to us or terminate their relationship with us, pursue competing relationships or attempt to develop or acquire processes that compete with ours. Any such action could materially adversely affect our business.
A lack of government subsidies may hinder the usefulness of our technology.
While our long-term business model is based on licensing our technology to original equipment manufacturers (OEMs), distributors, resellers, service providers and other licensees, we also assemble and sell complete solutions based on EWS. Subsidies of any of the industries vary and may be reduced or eliminated, which could have a material adverse effect on our business. Likewise, regulations may become more onerous which also could have a material adverse effect on our business.
The industries in which we operate may endure deflationary cycles, affecting our ability to sell and license our systems.
As crude oil prices return below previously low levels, it will likely be difficult or impossible to sell or license systems to the oil and gas industry. Such events and other deflationary events may impact our business materially.
If we lose key employees and consultants or are unable to attract or retain qualified personnel, our business could suffer.
Our success is highly dependent on our ability to attract and retain qualified scientific, engineering and management personnel. We are highly dependent on our management, including T. Riggs Eckelberry, who has been critical to the development of our technology and business. The loss of the services of Mr. Eckelberry would have a material adverse effect on our operations. We do not have an employment agreement with Mr. Eckelberry. Accordingly, there can be no assurance that he will remain associated with us. His efforts will be critical to us as we continue to develop our technology and as we attempt to transition to a company with profitable commercialized products and services. If we were to lose Mr. Eckelberry, or any other key employees or consultants, we may experience difficulties in competing effectively, developing our technology and implementing our business strategies.
A significant percentage of our voting capital stock is held by our directors and executive officers, constituting a supermajority vote, and which allows such holders to take corporate actions such as amendment of certain provisions of the articles of incorporation and bylaws.
On March 15, 2017, the Company filed a Certificate of Designation for its Series C Preferred Stock with the Secretary of State of Nevada designating 1,000 shares of its authorized preferred stock as Series C Preferred Stock. The shares of Series C Preferred Stock have a par value of $0.0001 per share. The Series C Preferred Shares do not have a dividend rate or liquidation preference and are not convertible into shares of common stock. For so long as any shares of the Series C Preferred Stock remain issued and outstanding, the holders thereof, voting separately as a class, shall have voting power equal to 51% of the total vote (representing a super majority voting power) on all shareholder matters of the Company. Such vote shall be determined by the holder(s) of a majority of the then issued and outstanding shares of Series C Preferred Stock.
As of December 31, 2019, all shares of Series C Preferred Stock are held by our chief executive officer, T. Riggs Eckelberry. This means that our chief executive officer is the holder of 51% of the total vote on all shareholder matters of the Company presented for a shareholder vote. This may prevent or frustrate attempts by stockholders to change the board of directors or current management and could make a third-party acquisition of the Company difficult which could limit the price that investors might be willing to pay in the future for shares of the Company’s common stock.
Competition from other companies in our market may affect the market for our technology.
New companies are constantly entering the market, thus increasing the competition. This could also have a negative impact on us or our customers’ ability to obtain additional capital from investors. Larger foreign owned and domestic companies which have been engaged in water cleanup for substantially longer periods of time may have access to greater financial and other resources. These companies may have greater success in the recruitment and retention of qualified employees, as well as in conducting their own fuel manufacturing and marketing operations, which may give them a competitive advantage. In addition, actual or potential competitors may be strengthened through the acquisition of additional assets and interests. If we or our customers are unable to compete effectively or adequately respond to competitive pressures, this may materially adversely affect our results of operation and financial condition.
An occurrence of an uncontrollable event such as the COVID-19 pandemic may negatively affect our operations.
The occurrence of an uncontrollable event such as the COVID-19 pandemic may negatively affect our operations. A pandemic typically results in social distancing, travel bans and quarantine, and this may limit access to our facilities, customers, management, support staff and professional advisors. These factors, in turn, may not only impact our operations, financial condition and demand for our goods and services but our overall ability to react timely to mitigate the impact of this event. Also, it may hamper our efforts to comply with our filing obligations with the Securities and Exchange Commission.
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Risks Related to Our Intellectual Property
If we fail to establish, maintain and enforce intellectual property rights with respect to our technology, our financial condition, results of operations and business could be negatively impacted.
Our ability to establish, maintain and enforce intellectual property rights with respect to the technology that we intend to license will be a significant factor in determining our future financial and operating performance. We seek to protect our intellectual property rights by relying on a combination of trade secret and copyright laws, and the licensing of external patents. We also use confidentiality and other provisions in our agreements that restrict access to and disclosure of our confidential know-how and trade secrets.
Outside of licensed patents, we seek to protect our technology as trade secrets and technical know-how. However, trade secrets and technical know-how are difficult to maintain and do not provide the same legal protections provided by patents. In particular, only patents will allow us to prohibit others from using independently developed technology that is similar. If competitors develop knowledge substantially equivalent or superior to our trade secrets and technical know-how, or gain access to our knowledge through other means such as observation of our technology that embodies trade secrets at customer sites which we do not control, the value of our trade secrets and technical know-how would be diminished.
While we strive to maintain systems and procedures to protect the confidentiality and security of our trade secrets and technical know-how, these systems and procedures may fail to provide an adequate degree of protection. For example, although we generally enter into agreements with our employees, consultants, advisors, and strategic partners restricting the disclosure and use of trade secrets, technical know-how and confidential information, we cannot provide any assurance that these agreements will be sufficient to prevent unauthorized use or disclosure. In addition, some of the technology deployed at customer sites in the future, which we do not control, may be readily observable by third parties who are not under contractual obligations of non-disclosure, which may limit or compromise our ability to continue to protect such technology as a trade secret.
Monitoring and policing unauthorized use and disclosure of intellectual property is difficult. If we learned that a third party was in fact infringing or otherwise violating our intellectual property, we may need to enforce our intellectual property rights through litigation. Litigation relating to our intellectual property may not prove successful and might result in substantial costs and diversion of resources and management attention.
From our customer licensees’ standpoint, the strength of the intellectual property under which we intend to grant licenses can be a critical determinant of the value of these licenses. If we are unable to secure, protect and enforce our intellectual property, it may become more difficult for us to attract new licensees, and therefore customers. Any such development could have a material adverse effect on our business, prospects, financial condition and results of operations.
Although we have filed various patent applications for some of our core technologies, we have opted to abandon or transfer them, in favor of a trade secrets policy.
Even if we do pursue patent protection for our inventions, these patents may not provide meaningful protection or commercial advantage. In the US, patents only provide protection for a 20-year period starting from the filing date and the longer a patent application takes to issue the less time there is to enforce it. Further, the claims under any patents that issue from our applications may not be broad enough to prevent others from developing technologies that are similar or that achieve similar results. It is also possible that the intellectual property rights of others will bar us from licensing our technology and bar us or our future licensees from exploiting any patents that issue from our pending applications. Numerous U.S. and foreign issued patents and pending patent applications owned by others exist in the fields in which we have developed and are developing our technology. These patents and patent applications might have priority over our patent applications and could subject our patent applications to invalidation. Finally, in addition to those who may claim priority, any patents that issue from our applications may also be challenged by our competitors on the basis that they are otherwise invalid or unenforceable.
We may face claims that we are violating the intellectual property rights of others.
We may face claims, including from direct competitors, other energy companies, scientists or research universities, asserting that our technology or the commercial use of such technology infringes or otherwise violates the intellectual property rights of others. We have not conducted infringement, freedom to operate or landscape analyses, and as a result we cannot be certain that our technologies and processes do not violate the intellectual property rights of others. We expect that we may increasingly be subject to such claims as we begin to earn revenues and our market profile grows.
We may also face infringement claims from the employees, consultants, agents and outside organizations we have engaged to develop our technology. While we have sought to protect ourselves against such claims through contractual means, we cannot provide any assurance that such contractual provisions are adequate, and any of these parties might claim full or partial ownership of the intellectual property in the technology that they were engaged to develop.
If we were found to be infringing or otherwise violating the intellectual property rights of others, we could face significant costs to implement work-around methods, and we cannot provide any assurance that any such work-around would be available or technically equivalent to our current technology. In such cases, we might need to license a third party’s intellectual property, although any required license might not be available on acceptable terms, or at all. If we are unable to work around such infringement or obtain a license on acceptable terms, we might face substantial monetary judgments against us or an injunction against continuing to license our technology, which might cause us to cease operations.
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In addition, even if we are not infringing or otherwise violating the intellectual property rights of others, we could nonetheless incur substantial costs in defending ourselves in suits brought against us for alleged infringement. Also, if any license agreements provide that we will defend and indemnify our customer licensees for claims against them relating to any alleged infringement of the intellectual property rights of third parties in connection with such customer licensees’ use of our technologies, we may incur substantial costs defending and indemnifying any customer licensees to the extent they are subject to these types of claims. Such suits, even if without merit, would likely require our management team to dedicate substantial time to addressing the issues presented. Any party bringing claims might have greater resources than we do, which could potentially lead to us settling claims against which we might otherwise prevail on the merits.
Any claims brought against us or any customer licensees alleging that we have violated the intellectual property of others could have negative consequences for our financial condition, results of operations and business, each of which could be materially adversely affected as a result.
Risks Related to Our Common Stock
Our common stock could be further diluted as the result of the issuance of additional shares of common stock, convertible securities, warrants or options.
We have issued common stock, convertible securities (such as convertible debentures and notes) and warrants in order to raise money, some of which have anti-dilution and other similar protections. We have also issued incentive compensation for our employees and directors. We have shares of common stock reserved for issuance upon the exercise of certain of these securities and may increase the shares reserved for these purposes in the future. Our issuance of additional common stock, convertible securities, options and warrants could affect the rights of our stockholders, result in a reduction in the overall percentage holdings of our stockholders, could put downward pressure on the market price of our common stock, could result in adjustments to conversion and exercise prices of outstanding notes and warrants, and could obligate us to issue additional shares of common stock to certain of our stockholders.
There is a limited public market for our securities.
Our common stock is not listed on any national securities exchange. Accordingly, investors may find it more difficult to buy and sell our shares than if our common stock was traded on an exchange. Although our common stock is quoted on the OTC Pink, it is an unorganized, inter-dealer, over-the-counter market which provides significantly less liquidity than the NASDAQ Capital Market or other national securities exchange. These factors may have an adverse impact on the trading and price of our common stock. And our common stock may be less attractive for margin loans, for investment by financial institutions, as consideration in future capital raising transactions or other purposes.
The price of our common stock is volatile, which may cause investment losses for our stockholders.
The market for our common stock is highly volatile, having ranged during the fiscal year ended December 31, 2019 from a low of $0.08 to a high of $5.80. The trading price of our common stock on the OTC Market Pink is subject to wide fluctuations in response to, among other things, quarterly variations in operating and financial results, and general economic and market conditions. In addition, statements or changes in opinions, ratings, or earnings estimates made by brokerage firms or industry analysts relating to our market or relating to us could result in an immediate and adverse effect on the market price of our common stock. The highly volatile nature of our stock price may cause investment losses for our shareholders. In the past, securities class action litigation has often been brought against companies following periods of volatility in the market price of their securities. If securities class action litigation is brought against us, such litigation could result in substantial costs while diverting management’s attention and resources.
Shares eligible for future sale may adversely affect the market.
From time to time, certain of our stockholders may be eligible to sell all or some of their shares of common stock by means of ordinary brokerage transactions in the open market pursuant to Rule 144 promulgated under the Securities Act of 1933, as amended (the “Securities Act”), subject to certain limitations. In general, pursuant to Rule 144, non-affiliate stockholders may sell freely after six months subject only to the current public information requirement. Affiliates may sell after six months subject to the Rule 144 volume, manner of sale (for equity securities), and current public information and notice requirements. Any substantial sales of our common stock pursuant to Rule 144 may have a material adverse effect on the market price of our common stock.
Our stock is subject to the penny stock rules, which impose significant restrictions on broker-dealers and may affect the resale of our stock.
Our common stock has been subject to the provisions of Section 15(g) and Rule 15g-9 of the Securities Exchange Act of 1934, as amended (the “Exchange Act”), commonly referred to as the “penny stock” rule. Section 15(g) sets forth certain requirements for transactions in penny stocks and Rule 15g-9(d)(1) incorporates the definition of penny stock as that used in Rule 3a51-1 of the Exchange Act. The SEC generally defines penny stock to be any equity security that has a market price less than $5.00 per share, subject to certain exceptions. Rule 3a51-1 provides that any equity security is considered to be penny stock unless that security is: registered and traded on a national securities exchange meeting specified criteria set by the SEC; issued by a registered investment company; excluded from the definition on the basis of price (at least US$5.00 per share) or the registrant’s net tangible assets; or exempted from the definition by the Securities and Exchange Commission (“SEC”). Our common stock is considered to be a “penny stock.” The SEC has adopted rules that regulate broker-dealer practices in connection with transactions in “penny stocks.” As our common stock is considered to be “penny stock,” trading in our common stock is subject to additional sales practice requirements on broker-dealers who sell penny stock to persons other than established customers and accredited investors. This may reduce the liquidity and trading volume of our shares.
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Financial Industry Regulatory Authority, Inc. (“FINRA”) sales practice requirements may limit a shareholder’s ability to buy and sell our common shares.
In addition to the “penny stock” rules described above, FINRA has adopted rules that require that in recommending an investment to a customer, a broker-dealer must have reasonable grounds for believing that the investment is suitable for that customer. Prior to recommending speculative low priced securities to their non-institutional customers, broker-dealers must make reasonable efforts to obtain information about the customer’s financial status, tax status, investment objectives and other information. Under interpretations of these rules, FINRA believes that there is a high probability that speculative low priced securities will not be suitable for at least some customers. FINRA requirements make it more difficult for broker-dealers to recommend that their customers buy our common stock, which may limit your ability to buy and sell our stock and have an adverse effect on the market for our shares.
If we fail to maintain effective internal controls over financial reporting, the price of our common stock may be adversely affected.
We are required to establish and maintain appropriate internal controls over financial reporting. During the year ended December 31, 2019, we carried out an evaluation, under the supervision and with the participation of our management, including the principal executive officer and the principal financial officer, of the effectiveness of the design and operation of our disclosure controls and procedures. Based on that evaluation and due to the lack of segregation of duties due to small Company staff size, our principal executive officer and principal financial officer concluded that our disclosure controls and procedures were ineffective as of the end of the period covered by this report. Failure to establish those controls, or any failure of those controls once established, could adversely affect our public disclosures regarding our business, prospects, financial condition or results of operations. In addition, management’s assessment of internal controls over financial reporting may identify weaknesses and conditions that need to be addressed in our internal controls over financial reporting or other matters that may raise concerns for investors. Any actual or perceived weaknesses and conditions that need to be addressed in our internal control over financial reporting or disclosure of management’s assessment of our internal controls over financial reporting may have an adverse impact on the price of our common stock.
We are required to comply with certain provisions of Section 404 of the Sarbanes-Oxley Act of 2002 and if we fail to comply in a timely manner, our business could be harmed and our stock price could decline.
Rules adopted by the SEC pursuant to Section 404 of the Sarbanes-Oxley Act of 2002 require an annual assessment of internal controls over financial reporting, and for certain issuers an attestation of this assessment by the issuer’s independent registered public accounting firm. The standards that must be met for management to assess the internal controls over financial reporting as effective are evolving and complex, and require significant documentation, testing, and possible remediation to meet the detailed standards. We expect to incur significant expenses and to devote resources to Section 404 compliance on an ongoing basis. It is difficult for us to predict how long it will take or how costly it will be to complete the assessment of the effectiveness of our internal control over financial reporting for each year and to remediate any deficiencies, if any, in our internal controls over financial reporting. As a result, we may not be able to complete the assessment and remediation process on a timely basis. In addition, although attestation requirements by our independent registered public accounting firm are not presently applicable to us, we could become subject to these requirements in the future and we may encounter problems or delays in completing the implementation of any resulting changes to internal controls over financial reporting. In the event that our Chief Executive Officer or Chief Financial Officer determine that our internal controls over financial reporting is not effective as defined under Section 404, we cannot predict how regulators will react or how the market prices of our shares will be affected; however, we believe that there is a risk that investor confidence and share value may be negatively affected.
We do not intend to pay dividends on our common stock.
We do not anticipate paying cash dividends on our common stock in the foreseeable future. We may not have sufficient funds to legally pay dividends. Even if funds are legally available to pay dividends, we may nevertheless decide in our sole discretion not to pay dividends. The declaration, payment and amount of any future dividends will be made at the discretion of our board of directors, and will depend upon, among other things, the results of our operations, cash flows and financial condition, operating and capital requirements, and other factors our board of directors may consider relevant. There is no assurance that we will pay any dividends in the future on our common stock, and, if dividends are paid, there is no assurance with respect to the amount of any such dividend.
We may have violated Section 5 of the Securities Act.
We have been informed by the staff of the SEC that they believe the Company’s offering of securities under its offering statement on Form 1-A, was not made in compliance with applicable requirements of Regulation A under the Securities Act. The Company is in the process of amending the offering statement. However, sales we conducted under the offering statement prior to receiving this notification from the staff may have been made in violation of Section 5 of the Securities Act. This may result in claims for rescission which could have a material adverse effect on our liquidity.
ITEM 1B. UNRESOLVED STAFF COMMENTS.
Not applicable.
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Our principal offices are located at 2535 E. University Drive, McKinney, TX 75069. We, along with PWT, our Dallas based subsidiary, rent approximately a 12,000 square foot facility with a current monthly rent of $4,850.
In February 2019, a Complaint was filed in the Superior Court for the State of California, Case No. 30-2019-01052056-CU-BC-CJC, for breach of contract, common counts for sums due for services allegedly performed, and fraud. The Complaint was filed by RDI Financial, LLC (“RDI”), an assignee of Interdependence, Inc., and named the Company and our developmental subsidiary, WaterChain, Inc., as Defendants. RDI claimed that its assignor, Interdependence, Inc., entered into a contract with the Defendants for Interdependence to provide reputation and professional relationship management services. RDI claimed that Interdependence provided the services and that the Company was required to make certain payments of cash and our capital stock to Interdependence, but did not do so. RDI claims to be entitled to enforce the contract as the assignee, and is demanding monetary damages in the aggregate amount of $630,000.
While filed in February, 2019, the Company and WaterChain were unaware of the suit until September of 2019, when they received notice of a default judgment. Litigation counsel was engaged, the absence of prior notice, service of the suit and an improper default promptly challenged, and in October 2019 the Court vacated the default and judgment, and granted the Company and WaterChain leave to file an Answer and Cross-Complaint. Through these filings, the Company and WaterChain, Inc. contest the allegations and claims in the Complaint, and deny that Interdependence performed the required services and contends that we overpaid Interdependence $40,000 for whatever work was done. Specifically, in November, 2019, an Answer was filed denying the claims in the Complaint, along with a Cross-Complaint alleging fraudulent inducement to enter into the contract, negligent misrepresentations, breach of contract, and to rescind the underlying contract. Specifically, we have alleged that Interdependence misrepresented the nature and scope of the services which were to be provided and ability to provide them, misrepresented the results they would obtain from providing such services, and also failed to provide us with the services as required by the contract such that Interdependence was overpaid based on what it in fact did. For those reasons, and prior to any litigation, we terminated the contract for non-performance.
On February 6, 2020, the Superior Court set April 4, 2021 as the trial date for this matter. The Company and WaterChain are appropriately defending against the allegations and pursuing affirmative recovery on the cross-complaint. The Company disputes all claims and is appropriately litigating its defenses and pursuing recovery on its cross-suit. The parties are in the preliminary stages of settlement negotiations with the Plaintiff RDI and Interdependence, but we can provide no assurance that any settlement will be reached nor can we provide any assurances regarding any terms of such settlement. As of date of this report, legal fees and costs in this action have been substantial and it is impossible at this time to predict an exact amount, or even a meaningful estimate, of the aggregate sums that may be incurred in finally resolving or adjudicating this lawsuit.
ITEM 4. MINE SAFETY DISCLOSURES.
Not applicable.
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ITEM 5. MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS ISSUER PURCHASES OF EQUITY SECURITIES.
Our common stock is quoted on the OTC Markets Pink Open Market under the symbol “OCLN”.
For the periods indicated, the following table sets forth the high and low bid prices per share of common stock. These prices represent inter-dealer quotations without retail markup, markdown, or commission and may not necessarily represent actual transactions.
| Fiscal Year 2019 | ||||||||
| High | Low | |||||||
| First Quarter | $ | 5.80 | 1.80 | |||||
| Second Quarter | $ | 2.20 | 0.40 | |||||
| Third Quarter | $ | 1.00 | 0.20 | |||||
| Fourth Quarter | $ | 1.97 | 0.08 | |||||
The market price of our common stock, like that of other technology companies, is highly volatile and is subject to fluctuations in response to variations in operating results, announcements of technological innovations or new products, or other events or factors. Our stock price may also be affected by broader market trends unrelated to our performance.
Holders
As of May 15, 2020, we had approximately 517 holders of record of our common stock. This number does not include beneficial owners whose shares are held in the names of various security brokers, dealers, and registered clearing agencies.
Dividend Policy
We have never paid any cash dividends on our common stock and do not anticipate paying any cash dividends on our common stock in the foreseeable future. We intend to retain future earnings to fund ongoing operations and future capital requirements of our business. Any future determination to pay cash dividends will be at the discretion of the board of directors and will be dependent upon our financial condition, results of operations, capital requirements and such other factors as the board of directors deems relevant.
Recent Sales of Unregistered Securities
There were no sales of unregistered securities during the fiscal year ended December 31, 2019 other than those transactions previously reported to the SEC on our quarterly reports on Form 10-Q and current reports on Form 8-K.
Section 4(a)(2) Securities Issuances
Consultant Issuances
Between May 11, 2020 and May 21, 2020, the Company issued to consultants and one employee an aggregate of 295,141 shares of the Company’s common stock in exchange for 6,000,000 shares of Series Preferred D-1 shares.
Conversion of Preferred Shares
Between April 2, 2020 and May 11, 2020, the Company sold an aggregate of 3,904 shares of the Company’s Series M preferred stock for an aggregate purchase price of $97,600.
Other Information
Paycheck Protection Program Loan
Between May 4, 2020 and May 5, 2020, the Company received loan proceeds in the aggregate amount of $345,000 (the “PPP Loan”) under the Paycheck Protection Program (the “PPP”) under the Coronavirus Aid, Relief and Economic Security Act. The principal and accrued interest under the Note is forgivable after eight weeks if the Company uses the PPP Loan proceeds for eligible purposes, including payroll, benefits, rent and utilities, and otherwise complies with PPP requirements. In order to obtain forgiveness of the PPP Loan, the Company must submit a request and provide satisfactory documentation regarding its compliance with applicable requirements. The Company must repay any unforgiven principal amount of the Note, with interest, on a monthly basis following the Deferral Period. The Company intends to use the proceeds of the PPP Loan specifically for eligible purposes and to pursue forgiveness, although no assurance is provided that forgiveness for all or any portion of the PPP Loan will be obtained.
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Restricted Stock Agreements
On May 18, 2020, the Company entered into Restricted Stock Grant Agreements (the “May RSGAs”) with its Chief Executive Officer, T. Riggs Eckelberry, members of the Board, employees and consultants to create management incentives to improve the economic performance of the Company and to increase its value and stock price. All shares issuable under the May RSGAs are performance based shares and none have yet vested nor have any been issued. The May RSGAs provide for the issuance of up to an aggregate of 10,500,000 shares of the Company’s common stock as follows: 2,000,000 to Mr. Eckelberry, 500,000 to each of the other three members of the Board, and an aggregate of 7,000,000 to employees and consultants provided certain milestones are met in certain stages; a) If the Company’s consolidated gross revenue, calculated in accordance with generally accepted accounting principles, consistently applied, equals or exceeds $15,000,000 for the trailing twelve month period, the Company will issue up to an aggregate of 5,250,000 shares of its common stock; b) If the Company’s consolidated operating profit (Operating Profit = Operating Revenue - Cost of Goods Sold - Operating Expenses - Depreciation & Amortization), calculated in accordance with generally accepted accounting principles, equals or exceeds $1,500,000 for the trailing twelve month period as reported as reported in the Company’s SEC Reports, the Company will issue up to an aggregate of 5,250,000 shares of its common stock. As the performance goals are achieved or if alternate vesting is qualified and selected, the shares shall become eligible for vesting and issuance.
Purchases of Equity Securities by the Issuer and Affiliated Purchasers
None.
ITEM 6. SELECTED FINANCIAL DATA.
N/A
ITEM 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATION.
The following discussion and analysis should be read together with our financial statements and the related notes appearing elsewhere in this Annual Report on Form 10-K. This discussion contains forward-looking statements reflecting our current expectations that involve risks and uncertainties. See “Forward-Looking Statements” for a discussion of the uncertainties, risks and assumptions associated with these statements. Actual results and the timing of events could differ materially from those discussed in our forward-looking statements as a result of many factors, including those set forth under “Risk Factors” and elsewhere in this Annual Report on Form 10-K.
Overview of Business
Our mission is to provide expertise and technology to help make clean water available for all. Specifically, we have the following initiatives:
| 1. | We license our technology worldwide to treat heavily polluted waters and also to remove harmful micro-contaminants from drinking water, using minimal energy, chemicals, and materials. |
| 2. | We are building a network of customer-facing water brands to expand our global market presence and our technical expertise. |
| 3. | We develop new business models, such as Investor Water™ and WaterChain™, both of which are designed to help achieve funding for water treatment and management systems. Both projects are in a research and development phase. |
Water is our most valuable resource, and the mission of OriginClear is to improve the quality of water and help return it to its original and clear condition.
The Group
In 2015, OriginClear embarked on a corporate strategy to acquire U.S. water service companies focused on specialized water treatment. OriginClear aims to offer a complementary, end-to-end offering to serve growing corporate demand for outsourced water treatment. To complement this acquisition strategy, we also incubate business units from cash flow.
On October 1, 2015, Dallas-based Progressive Water Treatment, Inc. (“PWT”) became the first acquisition in The OriginClear Group. PWT is a mature designer, builder and service provider for a wide range of industrial water treatment applications.
On July 19, 2018, the Company announced the launch of its Modular Water Treatment (MWS) 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. Beginning with its first installation, PWT built MWS components. The two units have now completed the process of integrating their operations fully, so they can benefit synergistically from each other’s technology and market opportunities building greater sales and profits. In addition, by integrating MWS’s engineering and manufacturing into the PWT facility, significant efficiencies and savings can occur. The Company regards the MWS program as a successful incubation.
On June 12, 2018, the Company announced that it had purchased an equity stake in Port St. Lucie, FL based Water Technologies International, Inc. (OTC: WTII) (“Water Technologies”), and lent Water Technologies additional funds, allowing Water Technologies to finalize its acquisition of West Palm Beach-based WaterZone, Inc. (“WaterZone”), which has specialized, for over 30 years, in complete system design, installations and maintenance for commercial, industrial and residential customers through Florida. The Company has substantially retained this stake.
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From time to time, OriginClear engages in discussions for additional, accretive acquisitions of companies specializing in complementary markets and applications and is incubating additional programs such as Investor Water™, a marketplace concept to connect investors with secured water projects. However, no assurance can be given that the Company will complete these acquisitions, or that the incubations will succeed.
The Technology
OriginClear is the proprietary developer of EWS, the high-speed, primarily chemical-free technology to clean up large quantities of water. It removes oils, suspended solids, certain dissolved solids, and pathogens, in a continuous and energy-efficient process. EWS is designed to be an early step in removal of oils, solids and pathogens; reducing the work that more expensive, downstream processes such as Ultra Filtration or Reverse Osmosis must do, therefore enabling more cost-efficient and high-volume water cleanup overall.
In March of 2016, OriginClear announced that it had successfully developed and proved Advanced Oxidation for its breakthrough water cleanup system, or EWS. University laboratory tests have shown that AOx™ can now extract dissolved contaminants, which are otherwise difficult to remove without chemicals such as chlorine.
Today, we are capable of pairing the two technologies as EWS:AOx™, or separately, as the application requires. OriginClear believes that its technology is valuable to the industry because it has the potential to greatly extend the life of membranes and filters by effectively treating very dirty, oily water, while reducing chemical use significantly.
OriginClear also believes that its Advanced Oxidation technology will help neutralize harmful micro-contaminants, such as industrial solvents, chemicals such as glyphosate, and microorganisms such as viruses, which is difficult or impossible to achieve with other technologies.
Overall, the system has shown a dramatic reduction in Total Organic Compounds which includes all forms of organic contamination, solids, miscible or dissolved, to meet new stringent global discharge requirements. Our technology integrates easily with other industry processes. We have begun to embed our technology into larger systems through licensing and joint ventures.
Technology Licensing
For its first eight years of operations, OriginClear focused uniquely on development and commercialization of its breakthrough Electro Water Separation™ technology. In 2015, the technology went into commercial phase, and the Company launched it as OriginClear Technologies, operating in parallel to the Group. The mission of OriginClear Technologies is to develop Electro Water Separation™ and achieve its full recognition as an international industry standard in treating our increasingly complex wastewater treatment challenges. For this purpose, OriginClear Technologies relies on an ongoing R&D and engineering activity for the development of its technology, while actively building its network of partners, licensees and joint venture partners for commercial development The Company had established OriginClear (HK), its wholly-owned subsidiary in Hong Kong, to manage Asia-Pacific market development, but the Company has since named India’s Permionics as its Strategic Partner for Asia-Pacific Region. The Company is in the process of closing OriginClear (HK); OriginClear continues to manage China opportunities from the United States. While OriginClear Technologies focuses on developing and monetizing the Company’s internally-developed Intellectual Property, best practices and trade secrets, it is expected to do the same for technologies which may come in the future with the Group’s acquisition of profitable water treatment companies. While the Company relies on trade secrets for its internally-developed inventions, it intends to maintain and defend any patents which come with an acquisition, just as it has committed to supporting the patents it has licensed from Daniel M. Early.
In the first Quarter of 2019, working with select licensees, we began to develop direct offerings of our two main applications for the technology to date: oil and gas and manure effluent treatment. (We believe that market conditions at this writing will prevent further exploitation of the oil and gas marketplace.) This was additional to the direct offerings by OriginClear (Hong Kong), primarily for ammonia removal, which we intend to continue to support from the United States and through our India partnership. Going forward, we intend to develop our direct offerings line to maximize penetration of the technology into markets.
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.
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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.
Use of Estimates
The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities, disclosure of contingent assets and liabilities at the date of the financial statements, and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. Significant estimates include estimates used to review the Company’s goodwill, impairments and estimations of long-lived assets, revenue recognition on percentage of completion type contracts, allowances for uncollectible accounts, inventory valuation, valuations of non-cash capital stock issuances and the valuation allowance on deferred tax assets. The Company bases its estimates on historical experience and on various other assumptions that are believed to be reasonable in the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. Actual results may differ from these estimates under different assumptions or conditions.
Fair Value of Financial Instruments
Fair value of financial instruments requires disclosure of the fair value information, whether or not recognized in the balance sheet, where it is practicable to estimate that value. As of December 31, 2019, the amounts reported for cash, prepaid expenses, accounts payable and accrued expenses approximate the fair value because of their short maturities.
Recently Issued Accounting Pronouncements
Management adopted a recently issued accounting pronouncement during the year ended December 31, 2019, as disclosed in the Notes to the financial statements included in this report.
Results of Operations for the years ended December 31, 2019 and 2018.
| Year Ended | ||||||||
| December 31, 2019 |
December 31, 2018 |
|||||||
| Revenue | $ | 3,587,894 | $ | 4,637,698 | ||||
| Cost Of Goods Sold | 3,217,028 | 3,484,018 | ||||||
| Operating Expenses, Depreciation and Amortization | 4,279,104 | 5,216,031 | ||||||
| Loss from Operations before Other Income/(Expense) | (3,908,238 | ) | (4,062,351 | ) | ||||
| Other Income/(Expense) | (23,565,440 | ) | (7,284,218 | ) | ||||
| Net Loss | $ | (27,473,678 | ) | $ | (11,346,569 | ) | ||
Revenue and Cost of Sales
Revenue for the year ended December 31, 2019 and 2018 was $3,587,894 and $4,637,698, respectively. Cost of sales for the year ended December 31, 2019 and 2018, was $3,217,028 and $3,484,018, respectively. Revenue decreased primarily due to our subsidiary’s decrease in revenue, due to focusing on marketing of its products.
Operating Expenses
Selling and Marketing Expenses
Selling and Marketing (“S&M”) expenses for the years ended December 31, 2019 and 2018, were $1,572,183 and $1,823,188, respectively. The decrease in selling and marketing expenses was primarily due to a decrease in marketing expense.
General Administrative Expenses
General administrative (“G&A”) expenses for the years ended December 31, 2019 and 2018, were $2,556,201 and $3,045,780, respectively. The decrease in general and administrative expenses was primarily due to a decrease in professional fees, outside services and overall cost cutting measures.
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Research and Development Cost
Research and development (“R&D”) costs for the years ended December 31, 2019 and 2018, were $107,351, and $290,542. The decrease in research and development costs was primarily due to a decrease in salaries, contractor expense and other research and development costs.
Depreciation Expense
Depreciation expense for the years ended December 31, 2019 and 2018, were $43,369 and $56,521, respectively.
Other Income and Expenses
Other income and (expenses) increased by $(16,281,222) to $(23,565,440) for the year ended December 31, 2019, compared to $(7,284,218) for the year ended December 31, 2018. The increase was predominantly the result of an increase in non-cash accounts associated with the fair value of the derivatives in the amount of $(19,019,129), increase in loss on settlement of convertible notes in the amount of $(348,307), increase in unrealized loss on investment securities in the amount of $(6,000), decrease in other income in the amount of $1,920, with offset by a decrease in loss on conversion of debt in the amount of $1,747,452, decrease in loss on sale of asset in the amount of $406, decrease in realized loss on investment in the amount of $39,538, decrease in commitment fees of $479,913 and decrease in interest expense of $910,545 which includes non-cash amortization of debt discount of $146,005.
Net Loss
Our net loss increased by $16,127,109 to $27,473,678 for the year ended December 31, 2019, compared to net loss of $11,346,569 for the year ended December 31, 2018. The majority of the increase in net loss was due primarily to an increase in other expenses associated with the net change in derivative instruments estimated each period. These estimates are based on multiple inputs, including the market price of our stock, interest rates, our stock price, volatility, variable conversion prices based on market prices defined in the respective agreements and probabilities of certain outcomes based on managements’ estimates. These inputs are subject to significant changes from period to period, therefore, the estimated fair value of the derivative liabilities will fluctuate from period to period, and the fluctuation may be material.
Liquidity and Capital Resources
Liquidity is the ability of a company to generate funds to support its current and future operations, satisfy its obligations, and otherwise operate on an ongoing basis. Significant factors in the management of liquidity are funds generated by operations, levels of accounts receivable and accounts payable and capital expenditures.
The financial statements have been prepared on a going concern basis of accounting, which contemplates continuity of operations, realization of assets and liabilities and commitments in the normal course of business. The accompanying consolidated financial statements do not reflect any adjustments that might result if we are unable to continue as a going concern. During the year ended December 31, 2019, we incurred a net loss of $27,473,678 and cash used in operations of $3,188,314. As of December 31, 2019, we had a working capital deficit of $38,598,414 and a shareholders’ deficit of $42,361,876. These factors, among others raise substantial doubt about our ability to continue as a going concern. Our independent auditors, in their report on our audited financial statements for the year ended December 31, 2019 expressed substantial doubt about our ability to continue as a going concern. The ability of us to continue as a going concern and appropriateness of using the going concern basis is dependent upon, among other things, additional cash infusion. We have obtained funds from our shareholders in the year ended December 31, 2019, and have standing purchase orders and open invoices with customers and we are pursuing various financing alternatives to fund the Company’s operations so it can continue as a going concern in the medium to long term. Management believes this funding will continue from our current investors and has also obtained funding from new investors. There can be no assurance that such funding will be available to the Company in the amount required at any time or, if available, that it can be obtained on terms satisfactory to the Company. Management believes the existing shareholders, the prospective new investors and current and future revenue will provide the additional cash needed to meet our obligations as they become due, and will allow the development of our core business operations.
At December 31, 2019 and December 31, 2018, we had cash of $490,614 and $609,144, respectively and working capital deficit of $38,598,414 and $12,888,290, respectively. The increase in working capital deficit was due primarily to an increase in non-cash derivative liabilities.
During the year ended December 31, 2019, we raised an aggregate of $3,263,050 in an offering of preferred stock. Our ability to continue as a going concern is dependent upon raising capital from financing transactions and future revenue, however, there cannot be any assurance that we will be able to raise additional capital from financings.
Net cash used in operating activities was $(3,221,393) for the year ended December 31, 2019, compared to $(3,452,427) for the year ended December 31, 2018. The decrease of $264,113 in cash used in operating activities was due primarily to a decrease in loss on convention of debt and shares issued for services.
Net cash flows (used in) investing activities for the year ended December 31, 2018 and 2018 were $(6,188) and $(195,109), respectively. The net decrease in cash provided in investing activities was mostly due to decrease in purchase of fixed assets, investment in security, and convertible note receivable.
Net cash flows provided by financing activities was $3,108,951 for the year ended December 31, 2019, as compared to $3,816,858 for the prior year ended December 31, 2018. The decrease in cash provided by financing activities was due to a decrease in loans payable and debt financing through convertible promissory notes.
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We do not have any material commitments for capital expenditures during the next twelve months. Although our proceeds from the issuance of convertible debt together with revenue from operations are currently sufficient to fund our operating expenses in the near future, we will need to raise additional funds in the future so that we can expand our operations. Therefore, our future operations are dependent on our ability to secure additional financing. Financing transactions may include the issuance of equity or debt securities, obtaining credit facilities, or other financing mechanisms. However, the trading price of our common stock and a downturn in the U.S. equity and debt markets could make it more difficult to obtain financing through the issuance of equity or debt securities. Even if we are able to raise the funds required, it is possible that we could incur unexpected costs and expenses, fail to collect significant amounts owed to us, or experience unexpected cash requirements that would force us to seek alternative financing. Furthermore, if we issue additional equity or debt securities, stockholders may experience additional dilution or the new equity securities may have rights, preferences or privileges senior to those of existing holders of our common stock. The inability to obtain additional capital may restrict our ability to grow and may reduce our ability to continue to conduct business operations. If we are unable to obtain additional financing, we may have to curtail our marketing and development plans and possibly cease our operations.
We have estimated our current average burn, and believe that we have assets to ensure that we can function without liquidation 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.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.
Not required for smaller reporting companies.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.
All financial information required by this Item is attached hereto at the end of this report beginning on page F-1 and is hereby incorporated by reference.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE.
None
ITEM 9A. CONTROLS AND PROCEDURES.
Evaluation of Disclosure Controls and Procedures
We carried out an evaluation, under the supervision and with the participation of our management, including our principal executive officer and principal financial officer, of the effectiveness of our disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)). Based upon that evaluation, our principal executive officer and principal financial officer concluded that, as of the end of the period covered in this report, 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.
A control system, no matter how well conceived and operated, can provide only reasonable, not absolute, assurance that the objectives of the control system are met. Further, the design of a control system must reflect the fact that there are resource constraints and the benefits of controls must be considered relative to their costs. Due to the inherent limitations in all control systems, no evaluation of controls can provide absolute assurance that all control issues and instances of fraud, if any, have been detected. During the year ended December 31, 2019, we carried out an evaluation, under the supervision and with the participation of our management, including the principal executive officer and the principal financial officer, of the effectiveness of the design and operation of our disclosure controls and procedures. Based on that evaluation and due to the lack of segregation of duties due to small Company staff size, our principal executive officer and principal financial officer concluded that our disclosure controls and procedures were ineffective as of the end of the period covered by this report. 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 annual report have been prepared in accordance with generally accepted accounting principles. Accordingly, management believes that the financial statements included in this report fairly present in all material respects our financial condition, results of operations and cash flows for the periods presented.
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Management’s Report on Internal Control Over Financial Reporting
Our management is responsible for establishing and maintaining adequate internal control over financial reporting as defined in Rule 13a-15(f) under the Exchange Act. Our management assessed the effectiveness of our internal control over financial reporting as of December 31, 2019. In making this assessment, our management used the criteria set forth by the Committee of Sponsoring Organizations of the Treadway Commission (“COSO”) in Internal Control-Integrated Framework (2013). A significant deficiency is a deficiency, or a combination of deficiencies, in internal control over financial reporting that is less severe than a material weakness, yet important enough to merit attention by those responsible for oversight of the registrant’s financial reporting.
Management has identified control deficiencies regarding the lack of segregation of duties due to small staff size and the need for a stronger internal control environment. The small size of the Company’s staff may prevent adequate controls in the future, such as segregation of duties, due to the cost/benefit of such remediation. The Company intends to add additional resources and controls during year 2020 to mitigate the above significant deficiency.
Changes in Internal Control Over Financial Reporting
There was no change in our internal control over financial reporting (as defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act) during the fiscal quarter ended December 31, 2019 that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.
No Attestation Report by Independent Registered Accountant
The effectiveness of our internal control over financial reporting as of December 31, 2019 has not been audited by our independent registered public accounting firm by virtue of our exemption from such requirement as a smaller reporting company.
None.
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ITEM 10. DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE.
EXECUTIVE OFFICERS, DIRECTORS AND KEY EMPLOYEES
The following table sets forth the names and ages of the members of our board of directors and our executive officers and the positions held by each.
| Name | Age | Position | ||
| T. Riggs Eckelberry | 68 | Chief Executive Officer, Chairman of the Board of Directors, Secretary, Treasurer, President and acting Chief Financial Officer | ||
| Anthony Fidaleo | 61 | Director | ||
| Jean-Louis Kindler | 57 | Director | ||
| Byron Elton | 65 | Director | ||
| Tom Marchesello | 50 | Chief Operating Officer |
T. Riggs Eckelberry - Chief Executive Officer, Chairman of the Board of Directors, Secretary, Treasurer, President and acting Chief Financial Officer
Mr. Eckelberry has served as our Chief Executive Officer, Chairman, Secretary, Treasurer, President and acting Chief Financial Officer since our inception in June 2007. As co-founder, Mr. Eckelberry brings his veteran technology management skills to the Blue Technology sector. As President and COO of CyberDefender Corporation from 2005 to 2006, he was instrumental in building the company and its innovative product line, helping to achieve initial funding and a NASDAQ IPO. From 2001 to mid-2005, he helped launch and turn around technology companies as founder and President of TechTransform, a technology consulting firm. In 2004, he was a key member of the team that commercialized YellowPages.com, resulting in its sale for $100 million to SBC/BellSouth. In 2003, he helped make Panda Software a key player in the US market as the General Manager of its US unit. During the high-tech boom of the 1990s, he was responsible for the global brand success of the software product, CleanSweep; as Chief Operating Officer of MicroHouse Technologies, he helped to achieve a successful sale of the company to Earthweb; and he was a key member of the team that sale of venture-backed TriVida to what is now a division of ValueClick: (VCLK). During Mr. Eckelberry’s early career in the non-profit sector, he received a master’s license for oceangoing vessels. As one of the founders of the Company and a veteran executive, Mr. Eckelberry’s experience and qualifications are essential to the board of directors.
Anthony Fidaleo – Director
Mr. Fidaleo has served as our director since June 2012. Mr. Fidaleo has run his own accounting and consulting practice since 1992, primarily as an acting Chief Financial Officer or Senior Consultant for publicly traded companies ranging from start-ups to Fortune 500 companies. From November 2005 to February 2009 Mr. Fidaleo was the Chief Financial Officer, Chief Operating Officer, Executive Vice President and Member of the Board of Directors and Operating Committee for iMedia International, Inc. an early stage publicly traded interactive content solutions company. Mr. Fidaleo is a California CPA (inactive) and was in public accounting from 1982 through 1992, primarily with BDO Seidman, LLP where he attained the level of audit senior manager. Mr. Fidaleo holds a B.S. degree in Accounting from California State University at Long Beach. Mr. Fidaleo’s accounting and financial experience qualifies him to serve as a member of our board of directors.
Jean-Louis Kindler – Director
Mr. (“JL”) Kindler is a longtime Director of the Company. As President of OriginClear Technologies, he led the commercialization of OriginClear’s breakthrough water treatment technology. Today, he is the CEO of Clean Energy Enterprises Inc., established to commercialize the Blue Tower biomass-to-hydrogen system he helped develop two decades ago in Japan. Mr. Kindler is a veteran of 25 years as both a top executive and engineer in environmental technologies. Before OriginClear, JL was co-founder and Chief Technology Officer of Ennesys, the company’s French joint venture, where he designed its patent-pending waste-to-energy system. Earlier, as founding CEO of MHS Equipment, a French nanotechnologies equipment manufacturing firm (42 M€, 360 employees in 2008), he led the development of a breakthrough fuel cell process. And earlier still, his twenty-year career in Japan gave him unique insight into fast-growing Asian markets. There, as principal of technology incubator Pacific Junction, JL completed various assignments. These included technology sourcing for the French industrial group GEC-Altshom, building the first commercial unit of the Blue Tower (to which he has recently returned in its now-fourth generation), and market development for a fluids mixing technology that helped inspire early OriginClear inventions. Mr. Kindler holds a Master’s in Economics and Public Policy from the Institute of Political Science in Lyon, France, and an MBA in International Management in Paris. Mr. Kindler’s executive and management experience, and past involvement in the company’s technology and operations, qualifies him to serve as a member of our board of directors.
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Byron Elton – Director
Mr. Elton has served as our director since January 2014. Mr. Elton is an experienced media and marketing executive with a proven record in pioneering new business development strategies and building top-flight marketing organizations. Since June 2018, he has been President of Elton Enterprises, Inc., which is involved in the wellness, fitness and health sector. Elton is currently opening six StretchLab Studios in the Los Angeles and Seattle markets (stretchlab.com). He is a co-founder since June 2017 of Pardue Associates, operating monsho, a brand-centric, creative communications agency focused on delivering results. From 2013 to 2017, Mr. Elton was a partner of Clear Search, an executive search firm. Prior to that, from 2009 until 2013, Mr. Elton served as President and Chief Executive Officer of Carbon Sciences, Inc. (“Carbon Sciences”) (OTCBB: CABN) and has served as Chairman of Carbon Sciences since March 2009. Carbon Sciences is an early stage company developing a technology to convert earth destroying carbon dioxide into a useful form that will not contribute to greenhouse gas. Mr. Elton previously served as Senior Vice President of Sales for Univision Online from 2007 to 2008. Mr. Elton also served for eight years as an executive at AOL Media Networks from 2000 to 2007, where his assignments included Regional Vice President of Sales for AOL and Senior Vice President of E-Commerce for AOL Canada. His broadcast media experience includes leading the ABC affiliate in Santa Barbara, California in 1995 to 2000 and the CBS affiliate in Monterrey, California, from 1998 to 1999, in addition to serving as President of the Alaskan Television Network from 1995 to 1999. Mr. Elton studied Advertising and Marketing Communications at Brigham Young University. Mr. Elton’s executive and management experience qualifies him to serve as a member of our board of directors.
Tom Marchesello – President & Chief Operating Officer.
Mr. Marchesello was named COO in June 2019. For the five years prior to joining the Company, Mr. Marchesello operated as an executive-level Business Consultant, specializing in environmental, social and governance (ESG) corporate strategy, operations, & investor relations to private-equity funded portfolio companies in high technology & industrial manufacturing industries. Prior to that, he was Director of M&A with Bainbridge. Mr. Marchesello served in the U.S. Air Force as a Captain at Air Force Space Command headquarters, leading aerospace operations and strategic planning for satellite communications, earth science monitoring and Geographic Information (GIS) and Positioning (GPS) Systems. After leaving the service, Mr. Marchesello worked in finance and high technology operations for 20 years with such companies as Sony Electronics, Thompson Reuters, Morgan Stanley, Bainbridge and CME Group. Mr. Marchesello holds a BS in Finance from Pennsylvania State University and an MBA from San Diego State University and holds US Patent #7,613,634, for performing Electronic Retailing. He received two Air Force Achievement Medals, two Air Force Commendation Medals and a Gulf War Service Medal.
Family Relationships
There are no family relationships among any of our directors and executive officers.
Legal Proceedings
During the past ten years, none of our directors or executive officers has been:
| ● | the subject of any bankruptcy petition filed by or against any business of which such person was a general partner or executive officer either at the time of the bankruptcy or within two years prior to that time; |
| ● | convicted in a criminal proceeding or is subject to a pending criminal proceeding (excluding traffic violations and other minor offenses); |
| ● | subject to any order, judgment, or decree, not subsequently reversed, suspended or vacated, of any court of competent jurisdiction or any Federal or State authority, permanently or temporarily enjoining, barring, suspending or otherwise limiting his involvement in any type of business, securities or banking activities; |
| ● | found by a court of competent jurisdiction (in a civil action), the Commission or the Commodity Futures Trading Commission to have violated a federal or state securities or commodities law; |
| ● | the subject of, or a party to, any Federal or State judicial or administrative order, judgment, decree, or finding, not subsequently reversed, suspended or vacated, relating to an alleged violation of (a) any Federal or State securities or commodities law or regulation; (b) any law or regulation respecting financial institutions or insurance companies including, but not limited to, a temporary or permanent injunction, order of disgorgement or restitution, civil money penalty or temporary or permanent cease-and-desist order, or removal or prohibition order; or (c) any law or regulation prohibiting mail or wire fraud or fraud in connection with any business entity; or |
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| ● | the subject of, or a party to, any sanction or order, not subsequently reversed, suspended or vacated, of any self-regulatory organization (as defined in Section 3(a)(26) of the Exchange Act (15 U.S.C. 78c(a)(26))), any registered entity (as defined in Section 1(a)(29) of the Commodity Exchange Act (7 U.S.C. 1(a)(29))), or any equivalent exchange, association, entity or organization that has disciplinary authority over its members or persons associated with a member. |
Election of Directors
Our directors are elected by the vote of a majority in interest of the holders of our voting stock and hold office until the expiration of the term for which he or she was elected and until a successor has been elected and qualified.
A majority of the authorized number of directors constitutes a quorum of the board of directors for the transaction of business. The directors must be present at the meeting to constitute a quorum. However, any action required or permitted to be taken by the board of directors may be taken without a meeting if all members of the board of directors individually or collectively consent in writing to the action.
Board Independence
We currently have four directors serving on our board of directors. We are not a listed issuer and, as such, are not subject to any director independence standards. Using the definition of “independent director,” as defined by Section 5605(a)(2) of the rules of the NASDAQ Capital Market, Anthony Fidaleo, Jean-Louis Kindler and Byron Elton would be considered independent directors.
Board of Directors Meetings and Attendance
The Board of Directors held four meetings in 2019, as well as acted by unanimous written consent. All Board members were present at all of the meetings. We have no formal policy regarding director attendance at the annual meeting of stockholders.
Committees of the Board of Directors
We have established an audit committee and compensation committee however we have not yet nominated any members to such committees, which we intend to do in the near future. To date, our entire board has performed all of the duties and responsibilities which might be contemplated by a committee.
Audit Committee. The audit committee will be composed of two independent directors, one of whom meets the requirements of an “Audit Committee Financial Expert.” The audit committee’s duties will be to recommend to the board of directors the engagement of independent auditors to audit our financial statements and to review our accounting and auditing principles. The audit committee will review the scope and fees for the annual audit and the results of audit examinations performed by the internal auditors and independent public accountants, including their recommendations to improve the system of accounting and internal controls. The audit committee will at all times to be composed exclusively of directors who are, in the opinion of the board of directors, free from any relationship which would interfere with the exercise of independent judgment as a committee member and who possess an understanding of financial statements and generally accepted accounting principles.
Compensation Committee. The compensation committee will be composed of at least two independent directors. The compensation committee will review and approve our compensation policies, including compensation of executive officers. The compensation committee will also review and administer our stock option plans, and recommend and approve grants of stock options under that plan.
We do not have a standing nominating committee nor are we required to have one. We do not currently have any established procedures by which security holders may recommend nominees to our Board of directors, however, any suggestions on directors, and discussions of board nominees in general, is handled by the entire board of directors.
Code of Ethics
We have adopted a code of business conduct and ethics that applies to all our directors, officers (including our Chief Executive Officer, Chief Financial Officer and any person performing similar functions) and employees. We have made our Code of Ethics available on our website at www.originclear.com/investing.
Compliance with Section 16(A) of the Exchange Act
Because we do not have a class of equity securities registered pursuant to Section 12 of the Exchange Act, we are not subject to Section 16(a) of the Exchange Act.
Board Leadership Structure and Role in Risk Oversight
Although we have not adopted a formal policy on whether the Chairman and Chief Executive Officer positions should be separate or combined, we have traditionally determined that it is in our best interests and our shareholders to combine these roles. Mr. Eckelberry has served as our Chairman since our inception in 2007. Due to the small size of the Company, we believe it is currently most effective to have the Chairman and Chief Executive Officer positions combined. Our board of directors receives and reviews periodic reports from management, auditors, legal counsel, and others, as considered appropriate regarding our company’s assessment of risks.
32
Our board of directors focuses on the most significant risks facing us and our general risk management strategy, and also ensures that risks undertaken by us are consistent with the Board’s appetite for risk. While the Board oversees our risk management, management is responsible for day-to-day risk management processes. We believe this division of responsibilities is the most effective approach for addressing the risks facing us.
ITEM 11. EXECUTIVE COMPENSATION.
The following table sets forth the compensation to our Chief Executive Officer and Chief Commercial Officer for the years ended 2019 and 2018:
| Salary | Bonus | Stock Awards | Option Awards | Non-Equity Incentive Plan Compensation | Non-qualified Deferred Compensation Earnings | All Other Compensation | Total | |||||||||||||||||||||||||||||
| Name and Principal Position | Year | ($) | ($) | ($) | ($) | ($) | ($) | ($) | ($) | |||||||||||||||||||||||||||
T. Riggs Eckelberry, Chairman of the Board, Acting CFO, | 2019 | 360,000 | 5,000 | - | - | - | - | 3,000 | 368,000 | |||||||||||||||||||||||||||
| Secretary & Treasurer, President and CEO | 2018 | 360,000 | 10,000 | - | - | - | - | 3,000 | 373,000 | |||||||||||||||||||||||||||
| Tom Marchesello (1) | 2019 | 87,500 | - | - | - | - | - | 87,500 | ||||||||||||||||||||||||||||
| Chief Operating Officer | 2018 | - | - | - | - | - | - | - | ||||||||||||||||||||||||||||
| Jean Louis Kindler (2) | 2019 | 34,499 | - | - | - | - | - | 34,499 | ||||||||||||||||||||||||||||
| Chief Commercial Officer | 2018 | 144,000 | - | - | - | - | - | 144,000 | ||||||||||||||||||||||||||||
| (1) | Mr. Marchesello was appointed Chief Operating Officer in June 2019. |
| (2) | Mr. Kindler resigned as Chief Commercial Officer in March 2019. |
Outstanding Equity Awards at 2019 Fiscal Year-End
There were no stock option plans outstanding as of December 31, 2019.
Employment Agreements
We currently do not have an employment agreement with our Chief Executive Officer, Mr. Eckelberry, who is paid an annual salary of $360,000. Bonus payments, if any, are determined by the Board of Directors. For the year ended 2019, our Chief Executive Officer received a bonus of $5,000. We currently do not have an employment agreement with our Chief Operating Officer, Mr. Marchesello, who is paid an annual salary of $150,000.
Employee Benefit Plans
Beginning June 1, 2008, we implemented a company health plan for our employees.
Compensation of Directors
Our current directors presently do not receive monetary compensation for their service on the board of directors. Directors may receive compensation for their services in the future and reimbursement for their expenses as shall be determined from time to time by resolution of the board of directors.
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ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS.
The following table sets forth certain information regarding the beneficial ownership of our common stock as of May 28, 2020, by (i) each director, (ii) each named executive officer, (iii) all directors and executive officers as a group, and (iv) each person who beneficially owns more than five percent of our common stock. Beneficial ownership is determined in accordance with the rules of the SEC. The percentage ownership of each beneficial owner is based on 9,812,845 outstanding shares of common stock. Except as indicated, each person listed below has sole voting and investment power with respect to the shares set forth opposite such person’s name.
| Name and Title of Beneficial Owner (1) | Number of Shares Beneficially Owned | Percentage of Shares | Percentage of Voting Power | |||||||||
| T. Riggs Eckelberry, Chief Executive Officer, Chairman, Secretary, Treasurer, President and acting Chief Financial Officer | 3 | * | 51 | %(2) | ||||||||
| Tom Marchesello, Chief Operating Officer | 340 | * | - | |||||||||
| Anthony Fidaleo, Director | 168 | * | - | |||||||||
| Byron Elton, Director | 168 | * | - | |||||||||
| Jean-Louis Kindler, Director | 1 | * | - | |||||||||
| Directors and executive officers as a group (5 persons) | 680 | * | 51 | %(2) | ||||||||
| * | Less than 1% |
| (1) | The address of each director and named executive officer listed above is c/o OriginClear, Inc., 2535 E. University Drive, McKinney, TX 75069. |
| (2) | Includes 1,000 shares of Series C Preferred Stock which entitles Mr. Eckelberry to 51% of the total vote representing a super majority voting power on all shareholder matters of the Company. The ownership of these shares is conditioned on the holder’s continued position as CEO. |
On March 15, 2017, the Company filed a Certificate of Designation for its Series C Preferred Stock with the Secretary of State of Nevada (the “Certificate of Designation”) designating 1,000 shares of its authorized preferred stock as Series C Preferred Stock. The shares of Series C Preferred Stock have a par value of $0.0001 per share. The Series C Preferred Shares do not have a dividend rate or liquidation preference and are not convertible into shares of common stock.
For so long as any shares of the Series C Preferred Stock remain issued and outstanding, the holders thereof, voting separately as a class, shall have voting power equal to 51% of the total vote (representing a super majority voting power) on all shareholder matters of the Company. Such vote shall be determined by the holder(s) of a majority of the then issued and outstanding shares of Series C Preferred Stock.
The shares of the Series C Preferred Stock shall be automatically redeemed by the Company at their par value on the first to occur of the following triggering events: (i) on the date that Mr. Eckelberry ceases, for any reason, to serve as officer, director or consultant of the Company, or (ii) on the date that the Company’s shares of common stock first trade on any national securities exchange provided that the listing rules of any such exchange prohibit preferential voting rights of a class of securities of the Company, or listing on any such national securities exchange is conditioned upon the elimination of the preferential voting rights of the Series C Preferred Stock set forth in the Certificate of Designation.
Equity Compensation Plan Information
There were no stock option incentive plans outstanding as of December 31, 2019.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR INDEPENDENCE.
Except as set forth in Item 11 under “Executive Compensation,” and Note 8 under “Loan Payable – Related Party”, since January 1, 2019 there has not been, nor is there any proposed transaction where we were or will be a party in which the amount involved exceeded or will exceed $120,000 and in which any director, executive officer, holder of more than 5% of any class of our voting securities, or any member of the immediate family of any of the foregoing persons had or will have a direct or indirect material interest.
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ITEM 14. PRINCIPAL ACCOUNTANT FEES AND SERVICES.
Audit Fees
The following table shows fees that were billed by our independent registered public accounting firm for professional services rendered in 2019 and 2018. Audit fees represent fees for professional services performed by M&K CPAS, PLLC (“M&K”) or Liggett & Webb, P.A. (“Liggett & Webb”), as applicable, for the audit of our financial statements and the review of our quarterly financial statements, as well as services that are normally provided in connection with statutory and regulatory filings or engagements. Liggett & Webb, P.A. served as our independent registered public accounting firm through September 30, 2019. We engaged M& K as our independent registered public accounting on September 30, 2019.
| Fiscal Year | Audit Fees | Audit-Related Fees | Tax Fees | All Other Fees | ||||||||||||
| 2019 – M&K CPAS, PLLC | $ | 40,000 | $ | - | $ | - | $ | - | ||||||||
| 2019 – Liggett & Webb, P.A. | $ | 68,000 | $ | - | $ | - | $ | - | ||||||||
| 2018 – Liggett & Webb, P.A. | $ | 79,000 | $ | - | $ | - | $ | - | ||||||||
Audit-Related Fees
We did not incur assurance and audit-related fees during 2019 and 2018, to M&K or Liggett & Webb, as applicable, nor in connection with the audit of our financial statements for the reviews of registration statements and issuance of related consents and assistance with SEC comment letters.
Tax Fees
We did not incur fees for tax compliance, tax advice, or tax planning for the fiscal years ended December 31, 2019 and 2018, respectively.
All Other Fees
There were no fees billed to us by M&K or Liggett& Webb, as applicable, for services rendered to us during the fiscal years ended December 31, 2019 and 2018, respectively, other than the services described above under “Audit Fees” and “Audit-Related Fees.”
As of the date of this filing, our current policy is to not engage our independent registered public accounting firm to provide, among other things, bookkeeping services, appraisal or valuation services, or international audit services. The policy provides that we engage our independent registered public accounting firm to provide audit and other assurance services, such as review of SEC reports or filings, as set forth above.
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ITEM 15. EXHIBITS, FINANCIAL STATEMENT SCHEDULES.
* Filed herewith
** Management compensation plan
*** Management compensation agreement
36
| (1) | Incorporated by reference to the Company’s Form SB-2 filed with the SEC on December 11, 2007. |
| (2) | Incorporated by reference to the Company’s Current Report on Form 8-K filed with the SEC on July 20, 2011. |
| (3) | Incorporated by reference to the Company’s Current Report on Form 8-K filed with the SEC on June 14, 2012. |
| (4) | Incorporated by reference to the Company’s Current Report on Form 10-Q filed with the SEC on August 14, 2014. |
| (5) | Incorporated by reference to the Company’s Current Report on Form 8-K filed with the SEC on April 16, 2015. |
| (6) | Incorporated by reference to the Company’s Current Report on Form 8-K filed with the SEC on October 6, 2015. |
| (7) | Incorporated by reference to the Company’s Annual Report on Form 10-K filed with the SEC on April 4, 2016. |
| (8) | Incorporated by reference to the Company’s Quarterly Report on Form 10-Q for the Quarter ended June 30, 2016 filed with the SEC on August 15, 2016. |
| (9) | Incorporated by reference to the Company’s Current Report on Form 8-K filed with the SEC on March 16, 2017. |
| (10) | Incorporated by reference to the Company’s Annual Report on Form 10-K filed with the SEC on March 31, 2017. |
| (11) | Incorporated by reference to the Company’s Current Report on Form 8-K filed with the SEC on April 12, 2017. |
| (12) | Incorporated by reference to the Company’s Current Report on Form 8-K filed with the SEC on June 30, 2017. |
| (13) | Incorporated by reference to the Company’s Current Report on Form 8-K filed with the SEC on December 6, 2017. |
| (14) | Incorporated by reference to the Company’s Quarterly Report on Form 10-Q for the Quarter ended June 30, 2017 filed with the SEC on August 14, 2017. |
| (15) | Incorporated by reference to the Company’s Quarterly Report on Form 10-Q for the Quarter ended September 30, 2015 filed with the SEC on November 16, 2015. |
| (16) | Incorporated by reference to the Company’s Current Report on Form 8-K filed with the SEC on October 6, 2015. |
| (17) | Incorporated by reference to the Company’s Current Report on Form 8-K filed with the SEC on January 8, 2016. |
| (18) | Incorporated by reference to the Company’s Quarterly Report on Form 10-Q for the Quarter ended March 31, 2016 filed with the SEC on May 16, 2016. |
| (19) | Incorporated by reference to the Company’s Quarterly Report on Form 10-Q for the Quarter ended June 30, 2016 filed with the SEC on August 15, 2016. |
| (20) | In accordance with Item 601of Regulation S-K, this Exhibit is hereby furnished to the SEC as an accompanying document and is not deemed “filed” for purposes of Section 18 of the Securities Exchange Act of 1934 or otherwise subject to the liabilities of that Section, nor shall it be deemed incorporated by reference into any filing under the Securities Act of 1933. |
| (21) | Incorporated by reference to the Company’s Annual Report on Form 10-K filed for the Fiscal Year ended December 31, 2017 filed with the SEC on April 17, 2018. |
| (22) | Incorporated by reference to the Company’s Quarterly Report on Form 10-Q for the Quarter ended March 31, 2018 and filed with the SEC on May 21, 2018. |
| (23) | Incorporated by reference to the Company’s Quarterly Report on Form 10-Q for the Quarter ended June 30, 2018 and filed with the SEC on August 14, 2018. |
| (24) | Incorporated by reference to the Company’s Current Report on Form 8-K filed with the SEC on August 20, 2018. |
| (25) | Incorporated by reference to the Company’s Current Report on Form 8-K filed with the SEC on January 22, 2019. |
| (26) | Incorporated by reference to the Company’s Current Report on Form 8-K filed with the SEC on February 6, 2019. |
| (27) | Incorporated by reference to the Company’s Current Report on Form 8-K filed with the SEC on March 20, 2019. |
| (28) | Incorporated by reference to the Company’s Current Report on Form 8-K filed with the SEC on April 9, 2019. |
| (29) | Incorporated by reference to the Company’s Current Report on Form 8-K filed with the SEC on October 31, 2019. |
| (30) | Incorporated by reference to the Company’s Current Report on Form 10-Q for the Quarter ended June 30, 2019 filed with the SEC on August 19, 2019. |
| (31) | Incorporated by reference to the Company’s Current Report on Form 8-K filed with the SEC on December 17, 2019. |
| (32) | Incorporated by reference to the Company’s Current Report on Form 8-K filed with the SEC on May 1, 2020. |
| (33) | Incorporated by reference to the Company’s Annual Report on Form 10-K for the Year ended December 31, 2018 filed with the SEC on April 25, 2019. |
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In accordance with Section 13 or 15(d) 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.
| ORIGINCLEAR, INC. | ||
| By: | /s/ T Riggs Eckelberry | |
| T Riggs Eckelberry | ||
| Chief Executive Officer (Principal Executive Officer) | ||
| and Acting Chief Financial Officer | ||
| (Principal Accounting and Financial Officer) | ||
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons in the capacities and on the dates indicated.
| Date: May 29, 2020 | By: | /s/ T Riggs Eckelberry |
| T Riggs Eckelberry | ||
| Director, Chief Executive Officer and Acting Chief Financial Officer | ||
| Date: May 29, 2020 | By: | /s/ Anthony Fidaleo |
| Anthony Fidaleo | ||
| Director | ||
| Date: May 29, 2020 | By: | /s/ Jean-Louis Kindler |
| Jean-Louis Kindler | ||
| Director |
| Date: May 29, 2020 | By: | /s/ Byron Elton |
| Byron Elton | ||
| Director |
38
FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
F-1
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To
the Board of Directors and
Stockholders of OriginClear, Inc.
Opinion on the Financial Statements
We have audited the accompanying consolidated balance sheet of OriginClear, Inc. (the Company) as of December 31, 2019, and the related consolidated statement of operations and shareholder’s deficit, and cash flows for the year ended December 31, 2019, and the related notes (collectively referred to as the financial statements). In our opinion, the consolidated financial statements present fairly, in all material respects, the financial position of the Company as of December 31, 2019, and the results of its operations and its cash flows for the year ended December 31, 2019, in conformity with accounting principles generally accepted in the United States of America. The financial statements of OriginClear, Inc. as of December 31, 2018 were audited by other auditors whose report dated April 25, 2019 expressed an unqualified opinion on those statements.
Basis for Opinion
These consolidated financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on the Company’s consolidated financial statements based on our audit. We are a public accounting firm registered with the Public Company Accounting Oversight Board (United States) (PCAOB) and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audit in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the consolidated financial statements are free of material misstatement, whether due to error or fraud. The Company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. As part of our audit, we are required to obtain an understanding of internal control over financial reporting, but not for the purpose of expressing an opinion on the effectiveness of the Company’s internal control over financial reporting. Accordingly, we express no such opinion.
Our audit included performing procedures to assess the risks of material misstatement of the consolidated financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the consolidated financial statements. We believe that our audit provides a reasonable basis for our opinion.
The accompanying consolidated financial statements have been prepared assuming that the Company will continue as a going concern. As discussed in Note 1 to the consolidated financial statements, the Company suffered a net loss from operations and has a net capital deficiency, which raises substantial doubt about its ability to continue as a going concern. Management's plans regarding those matters are also described in Note 1. The consolidated financial statements do not include any adjustments that might result from the outcome of this uncertainty.
| /s/ M&K CPAS, PLLC | |
| We have served as the Company’s auditor since 2019. | |
| Houston, TX | |
| May 29, 2020 | |
F-2
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Board of Directors and Shareholders of
OriginClear, Inc.
Opinion on the Financial Statements
We have audited the accompanying consolidated balance sheet of OriginClear, Inc. (the "Company") as of December 31, 2018, the related statement of operations, shareholders’ deficit, and cash flows for the year then ended, and the related notes (collectively referred to as the "financial statements"). In our opinion, the consolidated financial statements present fairly, in all material respects, the financial position of the Company as of December 31, 2018, and the results of its operations and its cash flows for the year then ended, in conformity with accounting principles generally accepted in the United States of America.
The Company’s Ability to Continue as a Going Concern
The accompanying consolidated financial statements have been prepared assuming that the Company will continue as a going concern. As discussed in Note 1 to the financial statements, the Company does not generate revenue and has negative cash flows from operations. This raises substantial doubt about the Company’s ability to continue as a going concern. Management’s plans in regard to these matters are also described in Note 1. The financial statements do not include any adjustments that might result from the outcome of this uncertainty.
Basis for Opinion
These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on the Company's financial statements based on our audits. We are a public accounting firm registered with the Public Company Accounting Oversight Board (United States) ("PCAOB") and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audit in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement, whether due to error or fraud. The Company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting in accordance with the standards of the PCAOB. As part of our audits we are required to obtain an understanding of internal control over financial reporting but not for the purpose of expressing an opinion on the effectiveness of the Company's internal control over financial reporting. Accordingly, we express no such opinion in accordance with the standards of the PCAOB.
Our audit included performing procedures to assess the risks of material misstatement of the financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the financial statements. We believe that our audits provide a reasonable basis for our opinion.
/s/ Liggett & Webb, P.A.
We have served as the Company’s auditor since 2014
New York, NY
April 25, 2019, except as to the last paragraph of Note 1, as to which the date is January 21, 2020
F-3
ORIGINCLEAR, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
| December 31, 2019 | December 31, 2018 | |||||||
| ASSETS | ||||||||
| CURRENT ASSETS | ||||||||
| Cash | $ | 490,614 | $ | 609,144 | ||||
| Contracts receivable, less allowance for doubtful accounts of $0 and $6,996 respectively | 522,911 | 309,223 | ||||||
| Inventory | - | 13,736 | ||||||
| Contract assets | 26,287 | 111,001 | ||||||
| Convertible note receivable | 117,879 | 84,900 | ||||||
| Other receivable | 2,500 | - | ||||||
| Prepaid expenses | 47,483 | 46,584 | ||||||
| TOTAL CURRENT ASSETS | 1,207,674 | 1,174,588 | ||||||
| NET PROPERTY AND EQUIPMENT | 117,069 | 154,250 | ||||||
| OTHER ASSETS | ||||||||
| Fair value investment-securities | 9,600 | 22,800 | ||||||
| Trademark | 4,467 | 4,467 | ||||||
| Security deposit | 3,500 | 3,500 | ||||||
| TOTAL OTHER ASSETS | 17,567 | 30,767 | ||||||
| TOTAL ASSETS | $ | 1,342,310 | $ | 1,359,605 | ||||
| LIABILITIES AND SHAREHOLDERS’ DEFICIT | ||||||||
| Current Liabilities | ||||||||
| Accounts payable and other payable | $ | 1,144,545 | $ | 987,524 | ||||
| Accrued expenses | 1,163,146 | 1,152,982 | ||||||
| Cumulative preferred stock dividends payable | 92,472 | 25,085 | ||||||
| Contract liabilities | 428,009 | 112,894 | ||||||
| Capital lease, current portion | 9,088 | 9,088 | ||||||
| Customer deposit | 136,765 | 120,688 | ||||||
| Warranty reserve | 20,000 | 20,000 | ||||||
| Loan payable, merchant cash advance, net of finance fees of $0 and $123,458 respectively | 427,214 | 473,507 | ||||||
| Loan payable, related party | 187,054 | 219,841 | ||||||
| Promissory note, current portion | - | 110 | ||||||
| Derivative liabilities | 31,640,470 | 9,360,204 | ||||||
| Series F 8% Convertible Preferred Stock, 1,678 and 0 shares issued and outstanding, redeemable value of $1,678,000 and $0, respectively | 1,678,000 | - | ||||||
| Convertible promissory notes, net of discount of $0 and $146,005, respectively | 2,879,325 | 1,580,955 | ||||||
| Total Current Liabilities | 39,806,088 | 14,062,878 | ||||||
| Long Term Liabilities | ||||||||
| Capital lease, long term portion | 17,073 | 26,918 | ||||||
| Promissory note, long term portion | - | 74,867 | ||||||
| Series G 8% Convertible Preferred Stock, 530 shares issued and outstanding, respectively, redeemable value of $530,000 and $0, respectively | 530,000 | - | ||||||
| Series I 8% Convertible Preferred Stock, 797 shares issued and outstanding, respectively, redeemable value of $797,400 and $0, respectively | 797,400 | - | ||||||
| Series K 8% Convertible Preferred Stock, 2,001 shares issued and outstanding, respectively, redeemable value of $2,000,650 and $0, respectively | 2,000,650 | - | ||||||
| Convertible promissory notes, net of discount of $0 and $0, respectively | 552,975 | 2,076,472 | ||||||
| Total Long Term Liabilities | 3,898,098 | 2,178,257 | ||||||
| Total Liabilities | 43,704,186 | 16,241,135 | ||||||
| Series F 8% Convertible Preferred Stock, 0 and 1,743 shares issued and outstanding, redeemable value of $0 and $1,743,000, respectively | - | 1,743,000 | ||||||
| COMMITMENTS AND CONTINGENCIES (See Note 12) | ||||||||
| SHAREHOLDERS’ DEFICIT | ||||||||
| Preferred stock, $0.0001 par value, 550,000,000 shares authorized 1,000 shares of Series C issued and outstanding, respectively | - | - | ||||||
| 38,500,000 shares of Series D-1 issued and outstanding, respectively | 3,850 | 3,850 | ||||||
| 2,139,649 shares of Series E issued and outstanding, respectively | 214 | 214 | ||||||
| 349 shares of Series J issued and outstanding, respectively | - | - | ||||||
| 1,000 shares of Series L issued and outstanding, respectively | - | - | ||||||
| 34,200 shares of Series M issued and outstanding, respectively | 3 | - | ||||||
| Additional paid in capital, preferred stock | 171,257 | - | ||||||
| Common stock, $0.0001 par value, 16,000,000,000 shares authorized 4,854,993 and 875,244 equity shares issued and outstanding, respectively | 486 | 88 | ||||||
| Preferred treasury stock,1,000 and 1,000 shares outstanding, respectively | - | - | ||||||
| Additional paid in capital, common stock | 64,744,107 | 63,179,433 | ||||||
| Accumulated other comprehensive loss | (134 | ) | (134 | ) | ||||
| Accumulated deficit | (107,281,659 | ) | (79,807,981 | ) | ||||
| TOTAL SHAREHOLDERS’ DEFICIT | (42,361,876 | ) | (16,624,530 | ) | ||||
| TOTAL LIABILITIES AND SHAREHOLDERS’ DEFICIT | $ | 1,342,310 | $ | 1,359,605 | ||||
The accompanying notes are an integral part of these consolidated financial statements
F-4
ORIGINCLEAR, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE YEARS ENDED DECEMBER 31, 2019 AND 2018
| Years Ended | ||||||||
| December 31, 2019 | December 31, 2018 | |||||||
| Sales | $ | 3,587,894 | $ | 4,637,698 | ||||
| Cost of Goods Sold | 3,217,028 | 3,484,018 | ||||||
| Gross Profit | 370,866 | 1,153,680 | ||||||
| Operating Expenses | ||||||||
| Selling and marketing expenses | 1,572,183 | 1,823,188 | ||||||
| General and administrative expenses | 2,556,201 | 3,045,780 | ||||||
| Research and development | 107,351 | 290,542 | ||||||
| Depreciation and amortization expense | 43,369 | 56,521 | ||||||
| Total Operating Expenses | 4,279,104 | 5,216,031 | ||||||
| Loss from Operations | (3,908,238 | ) | (4,062,351 | ) | ||||
| OTHER INCOME (EXPENSE) | ||||||||
| Other income | 32,980 | 34,900 | ||||||
| Unrealized gain(loss) on investment securities | (13,200 | ) | (7,200 | ) | ||||
| Realized loss on investment | - | (39,538 | ) | |||||
| Loss on sale of asset | - | (406 | ) | |||||
| Amortization of financing fees and cost | (147,924 | ) | (35,776 | ) | ||||
| Gain on settlement of payable | 28,428 | - | ||||||
| Loss on settlement of convertible notes | (348,307 | ) | - | |||||
| Commitment fee | - | (479,913 | ) | |||||
| Loss on conversion of debt | (102,527 | ) | (1,849,979 | ) | ||||
| Loss on net change in derivative liability and conversion of debt | (22,280,266 | ) | (3,261,137 | ) | ||||
| Interest expense | (734,624 | ) | (1,645,169 | ) | ||||
| TOTAL OTHER (EXPENSE) INCOME | (23,565,440 | ) | (7,284,218 | ) | ||||
| NET INCOME (LOSS) | $ | (27,473,678 | ) | $ | (11,346,569 | ) | ||
| PREFERRED STOCK DIVIDENDS | $ | - | $ | (27,017 | ) | |||
| NET LOSS AVAILABLE TO SHAREHOLDERS | $ | (27,473,678 | ) | $ | (11,373,586 | ) | ||
| BASIC AND DILUTED LOSS PER SHARE ATTRIBUTABLE TO SHAREHOLDERS’ | $ | (12.66 | ) | $ | (50.93 | ) | ||
| WEIGHTED-AVERAGE COMMON SHARES OUTSTANDING, BASIC AND DILUTED | 2,170,270 | 223,334 | ||||||
The accompanying notes are an integral part of these consolidated financial statements
F-5
ORIGINCLEAR, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF SHAREHOLDERS’ DEFICIT
FOR THE YEARS ENDED DECEMBER 31, 2019 AND 2018
| Additional | Additional | Accumulated Other | ||||||||||||||||||||||||||||||||||
| Preferred stock | Paid-in | Common stock | Paid-in | Comprehensive | Accumulated | |||||||||||||||||||||||||||||||
| Shares | Amount | Capital | Shares | Amount | Capital | loss | Deficit | Total | ||||||||||||||||||||||||||||
| Balance at December 31, 2017 | 4,333 | 1 | - | 56,444 | 5 | 58,629,844 | (134 | ) | (68,461,412 | ) | (9,831,696 | ) | ||||||||||||||||||||||||
| Common stock issuance for conversion of debt and accrued interest | - | - | - | 457,188 | 46 | 2,815,479 | - | - | 2,815,525 | |||||||||||||||||||||||||||
| Common stock issued at fair value for services | - | - | 129,930 | 13 | 1,207,220 | - | - | 1,207,233 | ||||||||||||||||||||||||||||
| Common stock issued thru a private placement for purchase of Series F Preferred stock | - | - | - | 215,906 | 22 | (22 | ) | - | - | - | ||||||||||||||||||||||||||
| Common stock issued for conversion of Series B Preferred stock | (3,333 | ) | (1 | ) | - | 714 | - | - | - | - | - | |||||||||||||||||||||||||
| Series D Preferred stock issued thru a private placement | 15,805,554 | 1,581 | - | - | - | 278,419 | - | - | 280,000 | |||||||||||||||||||||||||||
| Series D Preferred stock converted to Series E Preferred stock | (15,805,554 | ) | (1,581 | ) | - | - | - | (278,419 | ) | - | - | (280,000 | ) | |||||||||||||||||||||||
| Series D-1 Preferred stock issued thru a private placement | 38,500,000 | 3,850 | - | - | - | (3,850 | ) | - | - | - | ||||||||||||||||||||||||||
| Series E Preferred stock issued thru a private placement | 2,440,871 | 244 | - | - | - | 506,854 | - | - | 507,098 | |||||||||||||||||||||||||||
| Series E Preferred stock converted to common stock | (301,222 | ) | (30 | ) | - | 15,062 | 2 | 28 | - | - | - | |||||||||||||||||||||||||
| Stock compensation cost | - | - | - | - | - | 50,897 | - | - | 50,897 | |||||||||||||||||||||||||||
| Cumulative preferred stock dividend | - | - | - | - | - | (27,017 | ) | - | - | (27,017 | ) | |||||||||||||||||||||||||
| Net loss | - | - | - | - | - | - | - | (11,346,569 | ) | (11,346,569 | ) | |||||||||||||||||||||||||
| Balance at December 31, 2018 | 40,640,649 | $ | 4,064 | - | 875,244 | $ | 88 | $ | 63,179,433 | $ | (134 | ) | $ | (79,807,981 | ) | $ | (16,624,530 | ) | ||||||||||||||||||
| Common stock issuance for conversion of debt and accrued interest | - | - | - | 2,647,017 | 265 | 729,001 | - | - | 729,266 | |||||||||||||||||||||||||||
| Common stock issued at fair value for services | - | - | - | 1,070,855 | 107 | 706,155 | - | - | 706,262 | |||||||||||||||||||||||||||
| Common stock issued thru a private placement for purchase of Series G Preferred stock | - | - | - | 82,799 | 8 | (8 | ) | - | - | - | ||||||||||||||||||||||||||
| Series J preferred stock converted into common stock | (50 | ) | - | - | 171,176 | 17 | (17 | ) | - | - | - | |||||||||||||||||||||||||
| Issuance of Series M Preferred stock in exchange for convertible note | 34,200 | 3 | 171,257 | - | - | - | - | - | 171,260 | |||||||||||||||||||||||||||
| Common stock reverse split share adjustment | - | - | - | 7,902 | 1 | (1 | ) | - | - | - | ||||||||||||||||||||||||||
| Cumulative Preferred stock dividends | - | - | - | - | - | 27,017 | - | - | 27,017 | |||||||||||||||||||||||||||
| Loss on conversion of debt | - | - | - | - | 102,527 | - | - | 102,527 | ||||||||||||||||||||||||||||
| Net Income | - | - | - | - | - | - | - | (27,473,678 | ) | (27,473,678 | ) | |||||||||||||||||||||||||
| Balance at December 31, 2019 | 40,674,799 | $ | 4,067 | $ | 171,257 | 4,854,993 | $ | 486 | $ | 64,744,107 | $ | (134 | ) | $ | (107,281,659 | ) | $ | (42,361,876 | ) | |||||||||||||||||
The accompany notes are an integral part of these consolidated financial statements
F-6
ORIGINCLEAR, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED DECEMBER 31, 2019 AND 2018
| Years Ended | ||||||||
| December 31, 2019 | December 31, 2018 | |||||||
| CASH FLOWS FROM OPERATING ACTIVITIES: | ||||||||
| Net loss | $ | (27,473,678 | ) | $ | (11,346,569 | ) | ||
| Adjustment to reconcile net loss to net cash used in operating activities | ||||||||
| Depreciation and amortization | 43,369 | 56,521 | ||||||
| Common stock and warrants issued for services | 706,262 | 1,207,233 | ||||||
| Stock option and warrant compensation expense | - | 50,897 | ||||||
| Loss on net change in valuation of derivative liability | 22,280,266 | 3,261,137 | ||||||
| Loss on conversion of debt | 102,527 | 1,849,979 | ||||||
| Loss on settlement of debt | 348,307 | - | ||||||
| Debt discount recognized as interest expense | 146,005 | 660,436 | ||||||
| Loss on sale of asset | - | 406 | ||||||
| Accrued interest on note receivable | (32,979 | ) | - | |||||
| Net unrealized loss on fair value of security | 13,200 | 7,200 | ||||||
| Realized loss on security investment | - | 39,538 | ||||||
| Exchange of investment for services | - | 80,000 | ||||||
| Amortization of financing cost | 165,552 | 35,776 | ||||||
| Gain on settlement of payable | (28,428 | ) | - | |||||
| Change in Assets (Increase) Decrease in: | ||||||||
| Contracts receivable | (213,688 | ) | 151,218 | |||||
| Contract asset | 84,714 | (22,412 | ) | |||||
| Inventory asset | 13,736 | (122 | ) | |||||
| Prepaid expenses and other assets | (899 | ) | 15,023 | |||||
| Work in process | (2,500 | ) | 84,157 | |||||
| Change in Liabilities Increase (Decrease) in: | ||||||||
| Accounts payable | 167,821 | 124,092 | ||||||
| Accrued expenses | 127,928 | 317,894 | ||||||
| Cumulative preferred stock dividends payable | - | 25,085 | ||||||
| Contract liabilities | 315,115 | (41,154 | ) | |||||
| Customer deposit | 16,077 | 6,738 | ||||||
| Deferred income | - | (15,500 | ) | |||||
| NET CASH USED IN OPERATING ACTIVITIES | (3,221,293 | ) | (3,452,427 | ) | ||||
| CASH FLOWS USED FROM INVESTING ACTIVITIES: | ||||||||
| Fair value investment - security | - | (100,000 | ) | |||||
| Convertible note receivable | - | (80,000 | ) | |||||
| Proceeds from sale of asset | - | 2,000 | ||||||
| Purchase of fixed assets | (6,188 | ) | (17,109 | ) | ||||
| CASH USED IN INVESTING ACTIVITIES | (6,188 | ) | (195,109 | ) | ||||
| CASH FLOWS FROM FINANCING ACTIVITIES: | ||||||||
| Payments on capital lease | (9,845 | ) | (9,434 | ) | ||||
| Loan payable, truck | - | (15,699 | ) | |||||
| Loan payable financing, net | (184,625 | ) | 473,507 | |||||
| Loan payable, related party, net | - | 219,841 | ||||||
| Promissory note payable, related party | - | 74,977 | ||||||
| Payment of cumulative preferred stock dividends | - | (1,932 | ) | |||||
| Net cumulative preferred stock dividends payable | 40,371 | - | ||||||
| Proceeds from convertible promissory notes | - | 825,500 | ||||||
| Payment on redemption of preferred stock | (65,000 | ) | - | |||||
| Net proceeds for issuance of preferred stock for cash | 3,328,050 | 2,250,098 | ||||||
| NET CASH PROVIDED BY FINANCING ACTIVITIES | 3,108,951 | 3,816,858 | ||||||
| NET DECREASE IN CASH | (118,530 | ) | 169,322 | |||||
| CASH BEGINNING OF YEAR | 609,144 | 439,822 | ||||||
| CASH END OF YEAR | $ | 490,614 | $ | 609,144 | ||||
| SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION | ||||||||
| Interest paid | $ | 59,528 | $ | 155,708 | ||||
| Taxes paid | $ | - | $ | - | ||||
| SUPPLEMENTAL DISCLOSURES OF NON CASH TRANSACTIONS | ||||||||
| Common stock issued at fair value for conversion of debt and accrued interest | $ | 729,266 | $ | 2,815,525 | ||||
| Capitalized leased asset | $ | - | $ | 45,440 | ||||
| Preferred stock converted to common stock | $ | 17 | - | |||||
| Issuance of Series M preferred stock for settlement of debt | $ | 171,260 | - | |||||
| Stock issued through private placement | $ | 8 | $ | - | ||||
The accompanying notes are an integral part of these consolidated financial statements
F-7
ORIGINCLEAR, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - AUDITED
DECEMBER 31, 2019 AND 2018
| 1. | ORGANIZATION AND LINE OF BUSINESS |
Organization
OriginClear, Inc. (the “Company”) was incorporated in the state of Nevada on June 1, 2007. The Company, based in Los Angeles, California, began operations on June 1, 2007. The Company began its’ planned principle operations in December, 2010, at which time it exited the development stage.
In December 2014, the Company formed a wholly owned subsidiary, OriginClear Technologies Limited (OCT), formerly OriginClear (HK) Limited in Hong Kong, China. The Company granted OCT a master license for the People’s Republic of China. In turn, OCT is expected to license regional joint ventures for water treatment. As of December 31, 2019, OCT has limited assets and operations.
On October 1, 2015, the Company completed the acquisition of 100% of the total issued and outstanding stock of Progressive Water Treatment, Inc. (“PWT”) and is included in these consolidated financial statements as a wholly owned subsidiary.
On July 19, 2018, the Company announced the launch of its Modular Water Treatment Division. 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.
Line of Business
OriginClear is a provider of water treatment solutions and the developer of a breakthrough water cleanup technology. The Company’s technology integrates easily with other industry processes and can be embedded into larger systems through licensing and joint ventures. Through the acquisition of Progressive Water Treatment Inc., the Company is primarily engaged in providing water treatment systems and services for a wide variety of applications and component sales.
Going Concern
The accompanying financial statements have been prepared on a going concern basis of accounting, which contemplates continuity of operations, realization of assets and liabilities and commitments in the normal course of business. The accompanying financial statements do not reflect any adjustments that might result if the Company is unable to continue as a going concern. During the year ended December 31, 2019, the Company did not generate significant revenue, incurred a net loss of $27,473,678 and used cash in operations of $3,188,314. As of December 31, 2019, the Company had a working capital deficiency of $38,598,414 and a shareholders’ deficit of $42,361,876. These factors, among others raise substantial doubt about the Company’s ability to continue as a going concern. Our independent auditors, in their report on our audited financial statements for the year ended December 31, 2019 expressed substantial doubt about our ability to continue as a going concern.
The ability of the Company to continue as a going concern and appropriateness of using the going concern basis is dependent upon, among other things, achieving a level of profitable operations and receiving additional cash infusions. During the year ended December 31, 2019, the Company obtained funds from the issuance of convertible note agreements and from sales of its common stock. Management believes this funding will continue from its’ current investors and from new investors. The Company also generated revenue of $3,587,894 and has standing purchase orders and open invoices with customers which will provide funds for operations. Management believes the existing shareholders, the prospective new investors and future sales will provide the additional cash needed to meet the Company’s obligations as they become due and will allow the development of its core business operations. No assurance can be given that any future financing will be available or, if available, that it will be on terms that are satisfactory to the Company. Even if the Company is able to obtain additional financing, it may contain undue restrictions on our operations, in the case of debt financing or cause substantial dilution for our stockholders, in case of equity financing.
Reverse Stock Split
On October 25, 2019, the Company effected a one-for-two thousand (1 for 2,000) reverse stock split of its common stock (the “Reverse Split”). All shares, options, warrants and per share information throughout these consolidated financial statements have been retroactively restated to reflect the Reverse Split.
F-8
| 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.
Concentration Risk
Cash includes amounts deposited in financial institutions in excess of insurable Federal Deposit Insurance Company (FDIC) limits. At times throughout the year, the Company may maintain cash balances in certain bank accounts in excess of FDIC limits. As of December 31, 2019, the cash balance in excess of the FDIC limits was $201,007. The Company has not experienced any losses in such accounts and believes it is not exposed to any significant credit risk in these accounts.
Use of Estimates
The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities, disclosure of contingent assets and liabilities at the date of the financial statements, and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. Significant estimates include estimates used to review the Company’s impairments and estimations of long-lived assets, revenue recognition on percentage of completion type contracts, allowances for uncollectible accounts, warranty reserves, inventory valuation, derivative liabilities and other conversion features, fair value investments, valuations of non-cash capital stock issuances and the valuation allowance on deferred tax assets. The Company bases its estimates on historical experience and on various other assumptions that are believed to be reasonable in the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. Actual results may differ from these estimates under different assumptions or conditions.
Loss per Share Calculations
Basic loss per share calculations are computed by dividing income (loss) available to common shareholders by the weighted-average number of common shares available. Diluted earnings per share is computed similar to basic earnings per share except that the denominator is increased to include securities or other contracts to issue common stock that would have been outstanding if the potential common shares had been issued and if the additional common shares were dilutive. The Company’s diluted loss per share is the same as the basic loss per share for the years ended December 31, 2019 and 2018, respectively, as the inclusion of any potential shares would have had an anti-dilutive effect due to the Company generating a loss.
| For the Years Ended | ||||||||
| 2019 | 2018 | |||||||
| (Loss) to common shareholders (Numerator) | $ | (27,473,678 | ) | $ | (11,373,586 | ) | ||
| Basic and diluted weighted average number of common shares outstanding denominator | 2,170,270 | 223,334 | ||||||
F-9
Year ended December 31, 2019
The Company has excluded 122,044 warrants, shares issuable from convertible debt of $3,432,300 and shares issuable from convertible preferred stock for the year ended December 31, 2019, because their impact on the loss per share is anti-dilutive.
Year ended December 31, 2018
The Company has excluded 125,456 warrants, shares issuable from convertible debt of $3,657,427 and shares issuable from convertible preferred stock for the year ended December 31, 2018, because their impact on the loss per share is anti-dilutive.
Revenue Recognition
We recognize revenue when services are performed, and at the time of shipment of products, provided that evidence of an arrangement exists, title and risk of loss have passed to the customer, fees are fixed or determinable, and collection of the related receivable is reasonably assured.
Revenues and related costs on construction contracts are recognized as the performance obligations for work are satisfied over time in accordance with Accounting Standards Codification (“ASC”) 606, Revenue from Contracts with Customers. Under ASC 606, revenue and associated profit, will be recognized as the customer obtains control of the goods and services promised in the contract (i.e., performance obligations). All un-allocable indirect costs and corporate general and administrative costs are charged to the periods as incurred. However, in the event a loss on a contract is foreseen, the Company will recognize the loss as it is determined.
Revisions in cost and profit estimates during the course of the contract are reflected in the accounting period in which the facts for the revisions become known. Provisions for estimated losses on uncompleted contracts are made in the period in which such losses are determined. Changes in job performance, job conditions, and estimated profitability, including those arising from contract penalty provisions, and final contract settlements, may result in revisions to costs and income, which are recognized in the period the revisions are determined.
Contract receivables are recorded on contracts for amounts currently due based upon progress billings, as well as retention, which are collectible upon completion of the contracts. Accounts payable to material suppliers and subcontractors are recorded for amounts currently due based upon work completed or materials received, as are retention due subcontractors, which are payable upon completion of the contract. General and administrative expenses are charged to operations as incurred and are not allocated to contract costs.
Contract Receivable
The Company bills its customers in accordance with contractual agreements. The agreements generally require billing to be on a progressive basis as work is completed. Credit is extended based on evaluation of clients financial condition and collateral is not required. The Company maintains an allowance for doubtful accounts for estimated losses that may arise if any customer is unable to make required payments. Management performs a quantitative and qualitative review of the receivables past due from customers on a monthly basis. The Company records an allowance against uncollectible items for each customer after all reasonable means of collection have been exhausted, and the potential for recovery is considered remote. The allowance for doubtful accounts were $0 and $6,996 as of December 31, 2019 and 2018, respectively. The net contract receivable balance was $522,911 and $309,223 at December 31, 2019 and 2018, 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.
F-10
The Company tests for indefinite lived intangibles and goodwill impairment in the fourth quarter of each year and whenever events or circumstances indicate that the carrying amount of the asset exceeds its fair value and may not be recoverable. In accordance with its policies, the Company performed a qualitative assessment of indefinite lived intangibles and goodwill at December 31, 2019 and 2018, 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 $107,351 and $290,542 for the years ended December 31, 2019 and 2018, respectively.
Advertising Costs
The Company expenses the cost of advertising and promotional materials when incurred. The advertising costs were $48,594 and $103,791 for the years ended December 31, 2019 and 2018, respectively.
Property and Equipment
Property and equipment are stated at cost. Gain or loss is recognized upon disposal of property and equipment, and the asset and related accumulated depreciation are removed from the accounts. Expenditures for maintenance and repairs are charged to expense as incurred, while expenditures for addition and betterment are capitalized. Furniture and equipment are depreciated on the straight-line method and include the following categories:
| Estimated Life | ||
| Machinery and equipment | 5-10 years | |
| Furniture, fixtures and computer equipment | 5-7 years | |
| Vehicles | 3-5 years | |
| Leasehold improvements | 2-5 years |
| December 31, | ||||||||
| 2019 | 2018 | |||||||
| Machinery and Equipment | $ | 193,570 | $ | 192,330 | ||||
| Computer Equipment | 59,468 | 54,520 | ||||||
| Furniture | 29,810 | 29,810 | ||||||
| Leasehold Improvements | 26,725 | 26,725 | ||||||
| Vehicles | 64,276 | 64,276 | ||||||
| Demo Units | 36,139 | 36,139 | ||||||
| 409,988 | 403,800 | |||||||
| Less accumulated depreciation | (292,919 | ) | (249,550 | ) | ||||
| Net Property and Equipment | $ | 117,069 | $ | 154,250 | ||||
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 year ended December 31, 2019 and 2018, respectively was $43,369 and $56,521.
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.
F-11
The classification of derivative instruments, including whether such instruments should be recorded as liabilities or as equity, is evaluated at the end of each reporting period. Derivative instrument liabilities are classified in the balance sheet as current or non-current based on whether or not net-cash settlement of the derivative instrument could be required within 12 months of the balance sheet date.
Fair Value of Financial Instruments
Fair Value of Financial Instruments, requires disclosure of the fair value information, whether or not recognized in the balance sheet, where it is practicable to estimate that value. As of December 31, 2019, the balances reported for cash, contract receivables, cost in excess of billing, prepaid expenses, accounts payable, billing in excess of cost, and accrued expenses approximate the fair value because of their short maturities.
We adopted ASC Topic 820 for financial instruments measured as fair value on a recurring basis. ASC Topic 820 defines fair value, established a framework for measuring fair value in accordance with accounting principles generally accepted in the United States and expands disclosures about fair value measurements.
Fair value is defined as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. ASC Topic 820 established a three-tier fair value hierarchy which prioritizes the inputs used in measuring fair value. The hierarchy gives the highest priority to unadjusted quoted prices in active markets for identical assets or liabilities (level 1 measurements) and the lowest priority to unobservable inputs (level 3 measurements). These tiers include:
| ● | Level 1, defined as observable inputs such as quoted prices for identical instruments in active markets; | |
| ● | Level 2, defined as inputs other than quoted prices in active markets that are either directly or indirectly observable such as quoted prices for similar instruments in active markets or quoted prices for identical or similar instruments in markets that are not active; and | |
| ● | Level 3, defined as unobservable inputs in which little or no market data exists, therefore requiring an entity to develop its own assumptions, such as valuations derived from valuation techniques in which one or more significant inputs or significant value drivers are unobservable. |
The following table presents certain investments and liabilities of the Company’s financial assets measured and recorded at fair value on the Company’s balance sheets on a recurring basis and their level within the fair value hierarchy as of December 31, 2019 and 2018.
| Total | (Level 1) | (Level 2) | (Level 3) | |||||||||||||
| Investment at fair value-securities, December 31, 2019 | $ | 9,600 | $ | 9,600 | $ | - | $ | - | ||||||||
| Investment at fair value-securities, December 31, 2018 | $ | 22,800 | $ | 22,800 | $ | - | $ | - | ||||||||
| Total | (Level 1) | (Level 2) | (Level 3) | |||||||||||||
| Derivative Liability, December 31, 2019 | $ | 31,640,470 | $ | - | $ | - | $ | 31,640,470 | ||||||||
| Derivative Liability, December 31, 2018 | $ | 9,360,204 | $ | - | $ | - | $ | 9,360,204 | ||||||||
The following is a reconciliation of the derivative liability for which level 3 inputs were used in determining the approximate fair value:
| Balance as of January 1, 2018 | $ | 5,531,183 | ||
| Fair Value of derivative liabilities issued | 567,884 | |||
| Loss on conversion of debt and change in derivative liability | 3,261,137 | |||
| Balance as of December 31, 2018 | 9,360,204 | |||
| Loss on conversion of debt and change in derivative liability | 22,280,266 | |||
| Balance as of December 31, 2019 | $ | 31,640,470 |
F-12
For purpose of determining the fair market value of the derivative liability, the Company used Binomial lattice formula valuation model. The significant assumptions used in the Binomial lattice formula valuation of the derivative are as follows:
| 12/31/2019 | 12/31/2018 | |||||||
| Risk free interest rate | 1.48% - 1.69% | 2.48% - 2.63% | ||||||
| Stock volatility factor | 116.0% - 338.0% | 136.0% - 396.0% | ||||||
| Weighted average expected option life | 6 months - 5 years | 6 months - 5 years | ||||||
| Expected dividend yield | None | None |
Segment Reporting
The Company’s business currently operates in one segment based upon the Company’s organizational structure and the way in which the operations are managed and evaluated.
Marketable Securities
The Company adopted ASU 2016-01, “Financial Instruments – Recognition and Measurement of Financial Assets and Financial Liabilities.” ASU 2016-01 requires investments (except those accounted for under the equity method of accounting, or those that result in consolidation of the investee) to be measured at fair value with changes in fair value recognized in net income. It requires public business entities to use the exit price notion when measuring the fair value of financial instruments for disclosure purpose, and separate presentation of financial assets and financial liabilities by measurement category and form of financial asset. It eliminates the requirement for public business entities to disclose the method(s) and significant assumptions used to estimate the fair value that is required to be disclosed for financial instruments measured at amortized cost. The Company has evaluated the potential impact this standard may have on the condensed consolidated financial statements and determined that it had a significant impact on the condensed consolidated financial statements. The Company accounts for its investment in Water Technologies International, Inc. as available-for-sale securities, and the unrealized gain on the available-for-sale securities is recognized in net income.
Licensing agreement
The Company analyzed the licensing agreement using ASU 606 to determine the timing of revenue recognition. The licensing of the intellectual property (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 February 2016, the FASB established ASC Topic 842, Leases (Topic 842), by issuing ASU No. 2016-02, which requires lessees to recognize leases on-balance sheet and disclose key information about leasing arrangements. Topic 842 was subsequently amended by ASU No. 2018-01, Land Easement Practical Expedient for Transition to Topic 842; ASU No. 2018-10, Codification Improvements to Topic 842, Leases; and ASU No. 2018-11, Targeted Improvements. The new standard establishes a right-of-use (ROU) model that requires a lessee to recognize a ROU asset and lease liability on the balance sheet. Leases will be classified as finance or operating, with classification affecting the pattern and classification of expense recognition in the statement of operations. The Company adopted the new standard on January 1, 2019.
F-13
The new standard provides a number of optional practical expedients in transition. The Company has elected the ‘package of practical expedients’, which permit it not to reassess under the new standard its prior conclusions about lease identification, lease classification and initial direct costs. The Company did not elect the use-of-hindsight or the practical expedient pertaining to land easements; the latter is not applicable to the Company.
The new standard did not have a material impact on the Company’s audited consolidated financial statements.
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 B
On July 31, 2015, the Board of Directors of the Company adopted a Certificate of Designation establishing the rights, preferences, privileges and other terms of Series B Preferred Stock, par value $0.0001 per share which consists of 10,000 shares (the “Series B Preferred Stock”). On October 1, 2015, the Company filed the Certificate of Designation for the Series B Preferred Stock with the Secretary of State of Nevada and Series B Shares were issued to the shareholders of Progressive Water Treatment, Inc. in connection with the share exchange agreement. One third (1/3) of the shares received by the holder may be converted into common stock beginning one (1) year after the first date on which a share of Series B Preferred Stock was issued (the “Original Issue Date); one third (1/3) may be converted beginning two (2) years after the original issue date; and the remaining one third (1/3) may be converted beginning three years after the original issue date. The number of shares of common stock issuable for each share of converted Series B Preferred Stock shall be calculated by dividing the stated value by the market price, the market price shall be the average of the closing trade prices of the twenty-five (25) days prior to the date of the conversion notice. On August 12, 2016, the agreement was amended to include make-good-shares. The conversion price is to be adjusted to reflect the lower of $2,100 or the price of the Company’s Common Stock calculated using the average closing prices of the Company’s Common Stock on the last three (3) trading days prior to the date of conversion, provided, however, if the Average Closing Price is less than $700 per share, the adjusted conversion price shall be $700 per share.
F-14
The Series B Preferred Stock has redemption features that are redeemable solely at the option of the Company. Each share of Series B Preferred Stock has a stated value of $150 per share and is convertible into shares of the Company’s common stock at a conversion price of $1.05 per share, which may be converted to the Company’s common stock in three annual increments beginning 12 months from closing. The conversion price is subject to adjustment in the case of reverse splits, stock dividends, reclassifications and the like. In addition, the conversion price is subject to certain full ratchet anti-dilution protection. Accordingly, the preferred stock is valued under the provision of ASC Topic 815, Derivatives and Hedging, because the conversion feature of the preferred stock was not afforded the exemption for conventional convertible instruments due to its variable conversion rate. The Series B Preferred Stock shall have the rights, preferences and privileges as set forth in the exchange agreement.
During the year ended December 31, 2019, the Company issued 238 shares of common stock upon conversion of 3,333 shares of preferred stock at a price of $2,100 per share, plus 476 make good shares at a price of $700 per share. As of December 31, 2019, all shares of Series B were converted and no gain or loss was recognized because the transaction occurred within the terms of the agreement.
Series C
On March 14, 2017, the Board of Directors authorized the issuance of 1,000 shares of Series C preferred stock, par value $0.0001 per share, to T. Riggs Eckelberry in exchange for his continued employment with the Company. Holder of Series C preferred stock shall not be entitled to receive dividends, shall not be entitled to any liquidation preference and shares of Series C preferred stock shall have no conversion rights. 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 December 31, 2019, there are 1,000 shares of Series C preferred stock outstanding.
Series D
On April 13, 2018, the Board adopted resolutions creating a series of shares of convertible preferred stock designated as 0% Series D preferred stock (the “Series D preferred stock”) with a par value of $0.0001. The shares of Series D preferred stock do not have a dividend rate or liquidation preference and do not carry any voting rights. The purchase price shall be $0.02 per unit for an aggregate investment amount of less than $50,000; $0.018 for an aggregate amount of $50,000 or greater, but less than $100,000; $0.016 for an aggregate amount of $100,000 or greater, but less than $250,000; $0.014 for an aggregate amount of $250,000 or greater. At no time may all or a portion of the Series D preferred stock be converted if the number of shares of common stock to be issued pursuant to such conversion would exceed, when aggregated with all other shares of common stock owned by the holder at such time, the number of shares of common stock that would result in the holder beneficially owning (as determined in accordance with Section 13(d) of the Exchange Act and the rules thereunder) more than 4.99% of all of the common stock outstanding at such time, which amount may be increased to 9.99% at the holders discretion.
As of June 30, 2018, the Company issued 15,805,554 shares of Series D preferred stock through a private placement for a cash value of $280,000 at prices ranging $0.016 to $0.020. During the period ended September 30, 2018, the Series D shares were exchanged for 1,400,000 Series E preferred stock. As of December 31, 2019, there were no outstanding Series D preferred stock.
Series D-1
On April 13, 2018, the Company filed a Certificate of Designation for its Series D-1 Convertible preferred stock (the “Series D-1 preferred stock”) with the Secretary of State of Nevada designating 50,000,000 shares of its authorized preferred stock as Series D-1 preferred stock. The shares of Series D-1 preferred stock have a par value of $0.0001 per share. The shares of Series D-1 preferred stock do not have a dividend rate or liquidation preference. Each share of Series D-1 preferred stock is convertible 0.0005 of one share of common stock. The shares of Series D-1 preferred stock do not carry any voting rights. At no time may all or a portion of the Series D-1 preferred stock be converted if the number of shares of common stock to be issued pursuant to such conversion would exceed, when aggregated with all other shares of common stock owned by the holder at such time, the number of shares of common stock that would result in the holder beneficially owning (as determined in accordance with Section 13(d) of the Exchange Act and the rules thereunder) more than 4.99% of all of the common stock outstanding at such time, which amount may be increased to 9.99% at the holders discretion. The Company issued 38,500,000 preferred shares for services. As of December 31, 2019, there were 38,500,000 shares issued and outstanding.
F-15
Series E
On August 14, 2018, the Company filed a Certificate of Designation for its 0% Series E Convertible preferred stock (the “Series E preferred stock”) with the Secretary of State of Nevada designating 4,000,000 shares of its authorized preferred stock as Series E preferred stock, accompanied with five one-hundredths (0.05) warrants each for the purchase of one (1) share of common stock. The shares of Series E preferred stock have a par value of $0.0001 per share. The shares of Series E preferred stock do not have a dividend rate or 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 carry any voting rights. At no time may all or a portion of the Series E preferred stock be converted if the number of shares of common stock to be issued pursuant to such conversion would exceed, when aggregated with all other shares of common stock owned by the holder at such time, the number of shares of common stock that would result in the holder beneficially owning (as determined in accordance with Section 13(d) of the Exchange Act and the rules thereunder) more than 4.99% of all of the common stock outstanding at such time, which amount may be increased to 9.99% at the holders discretion. On August 14, 2018, the Company sold 1,040,871 shares of Series E preferred stock for $227,098. Also, on August 14, 2018, the Series D shares were cancelled and exchanged for 1,400,000 shares of Series E, for a total aggregate of 2,440,871 shares of Series E preferred stock. On December 27, 2018, the Company issued 15,062 shares of common upon conversion from Series E to common shares. As of December 31, 2019, there were 2,139,649 shares issued and outstanding.
Series F
On August 14, 2018, the Company filed a Certificate of Designation for its Series F Convertible preferred stock (the “Series F preferred stock”) with the Secretary of State of Nevada designating $2,000,000 units, with each unit consisting of 100 shares of the Company’s Series F preferred stock. The shares of Series F preferred stock have a par value of $0.0001 per share. The shares of Series F preferred stock do not have a liquidation preference. Each share of Series F preferred stock is convertible into one share of common stock. The shares of Series F preferred stock do not carry 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 may exercise such redemption right by providing a minimum of 5 days written notice of such redemption to the Holders. In the event the Company exercises such redemption right for less than all of the then-outstanding shares of Series F preferred stock, the Company shall redeem the outstanding shares of the Holders of a pro-rata basis. The Series F is mandatorily redeemable on September 1, 2020. At no time may all or a portion of the Series F preferred stock be converted if the number of shares of common stock to be issued pursuant to such conversion would exceed, when aggregated with all other shares of common stock owned by the holder at such time, the number of shares of common stock that would result in the holder beneficially owning (as determined in accordance with Section 13(d) of the Exchange Act and the rules thereunder) more than 4.99% of all of the common stock outstanding at such time, which amount may be increased to 9.99% at the holders discretion. As of December 31, 2019, there were 1,678 shares of Series F preferred stock issued and outstanding. As of December 31, 2019, the Company accrued dividends in the amount of $33,560.
Series G
On January 16, 2019, the Company filed a Series G Certificate of Designation with the Nevada Secretary of State (the “Series G Designation”). Pursuant to the Series G Certificate of Designation, the Company may issue up to 6,000 shares of 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. Pursuant to certain subscription agreements entered into with purchasers of the Series G preferred stock, each purchaser shall receive 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. Between January 16, 2019 and March 20, 2019, the Company entered into subscription agreements with certain accredited investors pursuant to which the Company sold an aggregate of 530 shares of the Company’s Series G preferred stock for an aggregate purchase price of $530,000, which is recognized as a loan payable. As of December 31, 2019, the Company issued an aggregate of 82,799 shares of its common stock to certain holders of its Series G preferred stock. The shares were issued within the terms of the agreement and no gain or loss was recognized. As of December 31, 2019, the Company accrued dividends in the amount of $10,600.
F-16
Series I
On April 3, 2019, the Company filed a Series I Certificate of Designation (the “Series I COD”) for its Series I Preferred Stock (the “Series I”) and a Series J Certificate of designation (the “Series J COD”) for its Series J Preferred Stock (the “Series J”) with the Nevada Secretary of State. Pursuant to the Series I COD, 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 will not be entitled to any voting rights except as may be required by applicable law, and will not be 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 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.
Series J
Pursuant to the Series J COD, 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 will be 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 holders of the Company’s previously disclosed Series F preferred stock and Series G preferred stock. As of December 31, 2019, the Company issued an aggregate of 797 shares of its Series I preferred stock and 349 shares of its Series J preferred stock. As of December 31, 2019, the Company accrued dividends in the amount of $15,948.
Series K
On June 3, 2019, the Company executed a Series K Certificate of Designation (the “Series K COD”) for its Series K Preferred Stock (the “Series K”) and a Series L Certificate of designation (the “Series L COD”) for its Series L Preferred Stock (the “Series L”). Pursuant to the Series K COD, 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 will not be entitled to any voting rights except as may be required by applicable law, and will not be 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 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.
Series L
Pursuant to the Series L COD, 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 will be entitled to receive dividends on an as-converted basis with the Company’s common stock. The Series L preferred stock is convertible into validly-issued, fully paid and non-assessable 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 holders of the Company’s previously disclosed investment rounds. As of December 31, 2019, the Company issued an aggregate of 2,001 shares of its Series K preferred stock and 1,000 shares of its Series L preferred stock. As of December 31, 2019, the Company accrued dividends in the amount of $32,364.
F-17
Series M
In connection with an exchange agreement (the “Exchange Agreement”) with a noteholder of the Company, on December 11, 2019, the Company executed a Series M Certificate of Designation (the “Series M COD”) for its Series M Preferred Stock (the “Series M”). Pursuant to the Series M COD, the Company designated 800,000 shares of preferred stock as Series M. The Series M entitles the holders to an annual 10% dividend, payable monthly, on the stated value of $25.00 per share, payable in preference to payment of any dividend on the common stock. Dividends are paid only for shares issued through the private placement. The Series M does not have voting rights, except as required by law and with respect to certain protective provisions set forth in the Series M COD. The Series M has a liquidation preference of $25.00 per share plus any accrued but unpaid dividends, before any payments to holders of common stock. The Series M is convertible into common stock in an amount determined by dividing the stated value being converted by the conversion price. The conversion price is equal to 80% of the average closing price of the common stock for the last five trading days prior to the date the Company receives a conversion notice. The Series M may not be converted to 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. The Series M will be redeemable at the option of the Company, after the first anniversary of the original issuance date of the Series M, at a redemption price of $25.00 per share plus any accrued but unpaid dividends.
Pursuant to the Exchange Agreement, the Company issued 34,200 shares of newly created Series M Preferred Stock of the Company to the holder in exchange for an outstanding convertible note of the Company in the amount of $171,260 (including accrued interest thereon). No gain or loss was recognized on the exchange of the note.
Common Stock
On April 23, 2019, the Company filed a certificate of amendment to its articles of incorporation, with the Secretary of the State of Nevada effectuate an increase to the number of authorized shares of common stock of the Company from 8,000,000,000 shares from 16,000,000,000.
Reverse Stock Split
On October 25, 2019, the Company effected a one-for-two thousand (1 for 2,000) reverse stock split of its common stock (the “Reverse Split”). All shares, options, warrants and per share information throughout these consolidated financial statements have been retroactively restated to reflect the Reverse Split.
Year ended December 31, 2019
The Company issued 2,647,017 shares of common stock for the settlement of convertible promissory notes in an aggregate principal in the amount of $535,035, plus interest in the amount of $116,306, and a default settlement of $77,925, with an aggregate fair value loss on conversion of debt in the amount of $102,527, based upon conversion prices of $0.05 to $1.84.
The Company issued 1,070,855 shares of common stock for services at fair value of $706,262.
The Company issued 82,799 shares of common stock through a private placement for purchase of Series G preferred stock.
The Company issued 171,176 shares of common stock upon conversion of 50 Series J preferred stock.
Year ended December 31, 2018
The Company issued 457,188 shares of common stock for the settlement of convertible promissory notes in an aggregate principal in the amount of $840,138, plus interest in the amount of $125,409, with an aggregate fair value loss on conversion of debt in the amount of $1,849,979, based upon conversion prices of $2.80 to $65.80.
The Company issued 129,930 shares of common stock for services at fair value of $1,207,233.
The Company issued 215,906 shares of common stock through a private placement for purchase of Series F preferred stock.
The Company issued 714 shares of common stock upon conversion of 3,333 Series B preferred stock.
The Company issued 15,062 shares of common stock upon conversion of 301,222 Series E preferred stock.
F-18
| 4. | OPTIONS AND WARRANTS |
Restricted Stock to CEO
Between May 12, 2016, and August 14, 2019, the Company entered into Restricted Stock Grant Agreements (“the RSGAs”) with its Chief Executive Officer, Riggs Eckelberry, to create management incentives to improve the economic performance of the Company and to increase its value and stock price. All shares issuable under the RSGAs are performance based shares and none have yet vested nor have any been issued. The RSGAs provides for the issuance of up to an aggregate of 109,214 shares of the Company’s common stock to Mr. Eckelberry provided certain milestones are met in certain stages; a) If the Company’s consolidated gross revenue, calculated in accordance with generally accepted accounting principles, consistently applied, equals or exceeds $15,000,000 for the trailing twelve month period as reported in the Company’s quarterly or annual financial statements, the Company will issue up to an aggregate of 54,607 shares of its common stock; b) If the Company’s consolidated operating profit (Operating Profit = Operating Revenue - Cost of Goods Sold - Operating Expenses - Depreciation & Amortization), calculated in accordance with generally accepted accounting principles, equals or exceeds $1,500,000 for the trailing twelve month period as reported as reported in the Company’s SEC Reports, the Company will issue up to an aggregate of 54,607 shares of its common stock. The Company has not recognized any costs associated with the milestones, because achievement is not probable. As the performance goals are achieved, the shares shall become eligible for vesting and issuance.
Restricted Stock to Employees and Consultants
Between May 12, 2016, and August 14, 2019, the Company entered into Restricted Stock Grant Agreements (“the E&C RSGAs”) with its’ employees and consultants, to create management incentives to improve the economic performance of the Company and to increase its value and stock price. All shares issuable under the E&C RSGAs are performance based shares and none have yet vested nor have any been issued. The E&C RSGAs provide for the issuance of up to 378,750 shares of the Company’s common stock to employees and consultants provided certain milestones are met in certain stages; a) If the Company’s consolidated gross revenue, calculated in accordance with generally accepted accounting principles, consistently applied, equals or exceeds $15,000,000 for the trailing twelve month period as reported in the Company’s quarterly or annual financial statements, the Company will issue up to an aggregate of 189,375 shares of its common stock; b) If the Company’s consolidated operating profit Operating Profit = Operating Revenue - Cost of Goods Sold - Operating Expenses - Depreciation & Amortization), calculated in accordance with generally accepted accounting principles, equals or exceeds $1,500,000 for the trailing twelve month period as reported as reported in the Company’s SEC Reports, the Company will issue up to an aggregate of 189,375 shares of its common stock. As of December 31, 2019, an aggregate of 30,250 shares issuable under the E&C RSGAs have been cancelled. The Company has not recognized any costs associated with the milestones, because achievement is not probable. As the performance goals are achieved, the shares shall become eligible for vesting and issuance.
On August 14, 2019, the Board of Directors approved an amendment to the RSGAs and E&C RSGAs to include an alternative vesting schedule for the Grantees. The Grantees can elect to participate in the alternate vesting schedule for grants received at least two years prior to the date requested. On the first day of each calendar month, an aggregate dollar amount of restricted stock equal to an aggregate of 5% of the total dollar amount of the Company’s common stock that traded during the prior calendar month, will vest, divided equally among all RSGAs and E&C RSGAs that have duly elected to participate in the alternate vesting schedule, with value based on the fair market value under the respective RSGAs and E&C RSGAs. The fair market value shall equal the average of the trailing ten (10) closing trade prices of the Company’s common stock on the last ten (10) trading days of the month immediately prior to the date of determination as quoted on the public securities trading market on which the Company’s common stock is then traded. If the fair market value of the Company’s common stock on the date the shares are vested is less than the fair market value of the Company’s common stock on the effective date of the RSGA or E&C RSGA, then the number of vested shares issuable (assuming all conditions are satisfied) shall be increased so that the aggregate fair market value of vested shares issuable on the vesting date equals the aggregate fair market value that such number of shares would have had on the effective date. Upon the occurrence of a Company performance goal, the right to participate in the alternate vesting schedule will terminate, and the vesting of the remaining unvested shares will be as set forth under the restricted stock award agreement. As of December 31, 2019, there was no alternative vesting selected and no shares were issued.
F-19
Warrants
During the years ended December 31, 2019 and 2018, no warrants were issued by the Company. A summary of the Company’s warrant activity and related information follows for the years ended December 31, 2019 and 2018:
| December 31, 2019 | December 31, 2018 | |||||||||||||||
| Weighted | Weighted | |||||||||||||||
| Number | average | Number | average | |||||||||||||
| of | exercise | of | exercise | |||||||||||||
| Warrants | price | Warrants | price | |||||||||||||
| Outstanding - beginning of year | 125,456 | $ | 740 | 26,781 | $ | 10,800 | ||||||||||
| Granted | - | $ | - | 122,044 | $ | - | ||||||||||
| Exercised | - | $ | - | - | $ | - | ||||||||||
| Forfeited | (3,412 | ) | $ | 240 | (23,369 | ) | $ | 180 | ||||||||
| Outstanding - end of year | 122,044 | $ | 500 | 125,456 | $ | 10,800 | ||||||||||
At December 31, 2019 and 2018, the weighted average remaining contractual life of warrants outstanding:
| December 31, 2019 | December 31, 2018 | |||||||||||||||||||||||||
| Weighted | Weighted | |||||||||||||||||||||||||
| Average | Average | |||||||||||||||||||||||||
| Remaining | Remaining | |||||||||||||||||||||||||
| Exercisable | Warrants | Warrants | Contractual | Warrants | Warrants | Contractual | ||||||||||||||||||||
| Prices | Outstanding | Exercisable | Life (years) | Outstanding | Exercisable | Life (years) | ||||||||||||||||||||
| $ | 240.00 | - | - | - | 3,412 | 3,412 | 0.42 | |||||||||||||||||||
| $ | 500.00 | 122,044 | 122,044 | 1.62 | 122,044 | 122,044 | 2.62 | |||||||||||||||||||
| 122,044 | 122,044 | 125,456 | 125,456 | |||||||||||||||||||||||
At December 31, 2019, the aggregate intrinsic value of the warrants outstanding was $0.
| 5. | CONVERTIBLE PROMISSORY NOTES |
As of December 31, 2019, the outstanding convertible promissory notes are summarized as follows:
| Convertible Promissory Notes | $ | 3,432,300 | ||
| Less current portion | 2,879,325 | |||
| Total long-term liabilities | $ | 552,975 |
Maturities of long-term debt for the next four years are as follows:
| Year Ending December 31, | Amount | |||
| 2020 | 2,879,325 | |||
| 2021 | 485,550 | |||
| 2022 | - | |||
| 2023 | 67,425 | |||
| $ | 3,432,300 | |||
At December 31, 2019, the Company had $3,432,300 in convertible promissory notes.
F-20
On various dates from 2014 through May 2015, the Company issued unsecured convertible promissory notes (the “2014-2015 Notes”), that matured on various dates and were extended sixty (60) months from the effective date of each Note. The 2014-2015 Notes bear interest at 10% per annum. The 2014-2015 Notes may be converted into shares of the Company’s common stock at conversion prices ranging from the lesser of $4,200 to $9,800 (subject to adjustment for stock splits, dividends, combinations and other similar transactions) or 50% of the lowest trade price on any trade day following issuance of the 2014-2015 Notes. In addition, for as long as the 2014-2015 Notes or other convertible notes in effect between the purchaser and the Company are outstanding, if the Company issues any security with terms more favorable than the terms of the 2014-2015 Notes or such other convertible notes or a term was not similarly provided to the purchaser of the 2014-2015 Notes or such other convertible notes, then such more favorable or additional term shall, at the purchaser’s option, become part of the 2014-2015 Notes and such other convertible notes. The conversion feature of the 2014-2015 Notes was considered a derivative in accordance with current accounting guidelines because of the reset conversion features of the 2014-2015 Notes. During the year ended December 31, 2019, according to the terms of the agreement, the Company issued 630,466 shares of common stock, upon conversion of $144,450 in principal, plus accrued interest of $66,161, with a fair value loss on settlement of $10,457. As of December 31, 2019, the 2014-2015 Notes had an aggregate remaining balance of $1,100,550.
The unsecured convertible promissory notes (the “OID Notes”) had an aggregate remaining balance of $184,124, plus accrued interest of $13,334. The OID Notes included an original issue discount and one-time interest, which has been fully amortized. The OID Notes matured on December 31, 2017, which were extended to June 30, 2018. The OID Notes were convertible into shares of the Company’s common stock at a conversion price initially of $30,620. After the amendment, the conversion price changed to the lesser of $5,600 per share, or b) fifty percent (50%) of the lowest trade price of common stock recorded since the original effective date of this note, or c) the lowest effective price per share granted to any person or entity after the effective date. The conversion feature of the notes was considered a derivative in accordance with current accounting guidelines, because of the reset conversion features of the notes. During the year ended December 31, 2019, according to the terms of the agreement, the Company issued 184,211 shares of common stock upon conversion of principal in the amount of $75,805. The remaining balance as of December 31, 2019, was $67,425.
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, 2022. The 2015-2016 Notes bear interest at 10% per annum. The 2015-2016 Notes may be converted into shares of the Company’s common stock at conversion prices ranging from the lesser of $1,400 to $5,600 (subject to adjustment for stock splits, dividends, combinations and other similar transactions) or 50% of the lowest trade price on any trade day following issuance of the 2015-2016 Notes. The conversion feature of the 2015-2016 Notes was considered a derivative in accordance with current accounting guidelines because of the reset conversion features of the 2015-2016 Notes. The remaining balance of the 2015-2016 Notes as of December 31, 2019, was $1,200,000.
The Company issued a convertible note (the “Dec 2015 Note”) in exchange for accounts payable in the amount of $432,048, which could be converted into shares of the Company’s common stock after December 31, 2015. The Dec 2015 Note was accounted for under ASC 470, whereby, a beneficial conversion feature was recorded at time of issuance. The Dec 2015 Note did not meet the criteria of a derivative, and was accounted for as a beneficial conversion feature, which was amortized over the life of the Dec 2015 Note and recognized as interest expense in the financial statements. On January 1, 2016, the Dec 2015 Note met the criteria of a derivative and was accounted for under ASC 815. The Dec 2015 Note has zero stated interest rate, and the conversion price shall be equal to 75% of the average three lowest last sale prices traded during the 25 trading days immediately prior to conversion. As of December 31, 2019, the remaining balance on the Dec 2015 Note was $167,048.
The Company issued a convertible note (the “Sep 2016 Note”) in exchange for accounts payable in the amount of $430,896, which could be converted into shares of the Company’s common stock after September 15, 2016. The Sep 2016 Note was accounted for under ASC 470, whereby, a beneficial conversion feature was recorded at time of issuance. The Sep 2016 Note met the criteria of a derivative and was accounted for under ASC 815. The Sep 2016 Note has zero stated interest rate, and the conversion price shall be equal to 75% of the average three lowest last sale prices traded during the 25 trading days immediately prior to conversion. The Sep 2016 Note did not meet the criteria of a derivative at the date of the issuance, and was accounted for as a beneficial conversion feature, which was amortized over the life of the Sep 2016 Note and recognized as interest expense in the financial statements. The conversion feature of the Sep 2016 Note was considered a derivative in accordance with current accounting guidelines because of the reset conversion feature of the Sep 2016 Note. The Company recorded amortization of debt discount, which was recognized as interest expense in the amount of $187,906 during the year ended December 31, 2019. As of December 31, 2019, the remaining balance on the Sep 2016 Note was $430,896.
F-21
The Company issued various unsecured convertible promissory notes (the “Jan-Aug 2018 Notes”), in the aggregate amount of $293,000 on various dates from January 24, 2018 thru August 28, 2018. The Jan-Aug 2018 Notes matures on dates from January 24, 2018 thru August 28, 2019. The Jan-Aug 2018 Notes bear interest at 10% per annum. The Jan-Aug 2018 Notes may be converted into shares of the Company’s common stock at a variable conversion price of 61% of the lowest one (1) trading day during the ten (10) trading days prior to conversion. The conversion feature of the Jan-Aug 2018 Notes was considered a derivative in accordance with current accounting guidelines because of the reset conversion features of the Jan-Aug 2018 Notes. During the year ended December 31, 2019, according to the terms of the agreement, the Company issued 74,014 shares of common stock, upon conversion of principal in the amount of $81,000, plus accrued interest of $5,903, and a loss on settlement of $40,500, with a fair value loss on conversion of debt in the amount of $99,667. The Company recorded amortization of debt discount, which was recognized as interest expense in the amount of $42,260 during the year ended December 31, 2019. As of December 31, 2019, the Jan-Aug 2018 Notes were fully converted.
The Company issued two (2) unsecured convertible promissory notes (the “Feb 2018 Notes”), in the aggregate principal amount of $157,500 (each in the amount of $78,750) on February 23, 2018. The Feb 2018 Notes had a maturity date of February 23, 2019, and bear interest at 10% per annum. The first of the two Feb 2018 Notes shall be paid for by the Buyer. The second of the two Feb 2018 Notes shall initially be paid for by the issuance of an offsetting $78,750 secured note issued to the Company by the Buyer. The first of the two notes was funded with cash and the Company must agree to the funding of the second of the two Feb 2018 Notes, before it can be funded with cash. The second of the two Feb 2018 Notes is secured by assets of the Buyer having a fair market value of at least $78,750. The second of the Feb 2018 Notes was issued on August 23, 2018 in the amount of $78,750. The second of the Feb 2018 Notes may be converted into shares of the Company’s common stock at a conversion price of $0.03 or 50% discount of the lowest trading price during the twenty (20) trading days prior to conversion. The conversion feature of the Feb 2018 Notes was considered a derivative in accordance with current accounting guidelines because of the reset conversion features of the Feb 2018 Notes. During the period ended June 30, 2019, the Company entered into a settlement agreement with the investor in the amount of $20,275 (50% of the outstanding balance of $40,550), based on the outstanding balance due and payable under the Notes. During the year ended December 31, 2019, according to the terms of the agreement, the Company issued 76,665 shares of common stock, upon conversion of principal in the amount of $40,550, plus accrued interest of $5,205, and a settlement loss of $20,275, with a fair value loss on conversion of debt of $152,056. The Company recorded amortization of debt discount, which was recognized as interest expense in the amount of $50,702 during the year ended December 31, 2019. As of December 31, 2019, the Note was fully converted.
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 mature on April 2, 2019 and May 31, 2019, respectively. The Apr & May 2018 Notes bear interest at 10% per annum. The Apr & May 2018 Notes may be converted into shares of the Company’s common stock at a variable conversion price of 50% of the lesser of the lowest trading price twenty five (25) trading days prior to conversion. The conversion feature of the Apr & May 2018 Notes was considered a derivative in accordance with current accounting guidelines because of the reset conversion features of the Notes. On March 13, 2019, the Company entered into a settlement agreement with the investor in the amount of $570,000, based on the outstanding balance due and payable under the Apr & May 2018 Notes. The Company set up a reserve of 2,630,769 shares of common stock of the Company for issuance upon conversion by the investor of the amounts owed under the Notes, in accordance with the terms of the Notes, including, but no limited to the beneficial ownership limitations contained in the Notes. In addition to the foregoing, upon the sale by the investor of the settlement shares as delivered to the investor by the Company, resulting in total net proceeds less than the settlement value, the investor is entitled to additional settlement shares of the Company’s common stock. If after the investor has sold all settlement shares, the investor delivers a written notice to the Company certifying that the investor is entitled to additional settlement shares of the Company’s common stock (the “Make-Whole Shares”). The number of make-whole shares being equal to the greater of ((i) zero and (ii) the quotient of (1) the difference of (x) the settlement value with respect to each sale of shares by the Investor after the delivery of the Settlement Shares, minus (y) the aggregate net consideration received by the Investor from the resale of all shares of common stock issued by the Company, divided by (2) the average trailing closing price for ten (10) trading days for the shares immediately preceding the date of delivery of the make-whole shares. During the year ended December 31, 2019, according to the terms of the agreement, the Company issued 1,118,394 shares of common stock upon conversion of principal in the amount of $83,930, plus accrued interest of $19,689, with a fair value loss on conversion of debt in the amount of $119,646. The Company recorded amortization of debt discount, which was recognized as interest expense in the amount of $51,605 during the year ended December 31, 2019. As of December 31, 2019, the remaining balance on the Apr & May 2018 Notes were $466,381.
F-22
The Company issued an unsecured convertible promissory notes (the “Nov 2018 Note”), in the sum amount of $75,000 on November 30, 2018. The Nov 2018 Note matures on November 30, 2019. The Nov 2018 Note bears interest at 10% per annum. The Nov 2018 Note may be converted into shares of the Company’s common stock at a fixed conversion price of $0.05 per share or 50% of the average three (3) lowest trading prices twenty (20) trading days prior to conversion. The conversion feature of the Nov 2018 Note was considered a derivative in accordance with current accounting guidelines because of the reset conversion features of the Notes. During the year ended December 31, 2019, according to terms of the agreement, the Company issued 363,229 shares of common stock upon conversion of principal in the amount of $75,000, plus accrued of $4,439, and a settlement loss of $17,150, with a fair value loss on conversion of debt in the amount of $138,078. The Company recorded amortization of debt discount, which was recognized as interest expense in the amount of $1,438 during the year ended December 31, 2019. The Nov 2018 Note was fully converted as of December 31, 2019.
We evaluated the financing transactions in accordance with ASC Topic 815, Derivatives and Hedging, and determined that the conversion feature of the convertible promissory notes was not afforded the exemption for conventional convertible instruments due to its variable conversion rate. The note has no explicit limit on the number of shares issuable, so they did not meet the conditions set forth in current accounting standards for equity classification. The Company elected to recognize the note under paragraph 815-15-25-4, whereby, there would be a separation into a host contract and derivative instrument. The Company elected to initially and subsequently measure the note in its entirety at fair value, with changes in fair value recognized in earnings. The Company recorded a derivative liability representing the imputed interest associated with the embedded derivative. The derivative liability is adjusted periodically according to the stock price fluctuations.
The derivative liability recognized in the financial statements as of December 31, 2019 was $31,640,470.
| 6. | REVENUE FROM CONTRACTS WITH CUSTOMERS |
Equipment Contracts
Revenues and related costs on equipment contracts are recognized as the performance obligations for work are satisfied over time in accordance with Accounting Standards Codification (“ASC”) 606, Revenue from Contracts with Customers. Under ASC 606, revenue and associated profit will be recognized as the customer obtains control of the goods and services promised in the contract (i.e., performance obligations). All un-allocable indirect costs and corporate general and administrative costs are charged to the periods as incurred. However, in the event a loss on a contract is foreseen, the Company will recognize the loss as it is determined.
The following table represents a disaggregation of revenue by type of good or service from contracts with customers for the year ended December 31, 2019 and 2018.
| Years Ended | ||||||||
| December 31, 2019 | ||||||||
| 2019 | 2018 | |||||||
| Equipment Contracts | $ | 2,130,625 | $ | 3,248,939 | ||||
| Component Sales | 959,080 | 1,187,507 | ||||||
| Waste Water Treatment Systems | 291,156 | - | ||||||
| Pump Stations | 100,763 | - | ||||||
| Services Sales | 86,270 | 125,645 | ||||||
| Licensing Fees | 20,000 | 75,607 | ||||||
| $ | 3,587,894 | $ | 4,637,698 | |||||
F-23
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 years ending December 31, 2019 and 2018, was $26,287 and $111,001, respectively. The contract liability for the years ended December 31, 2019 and 2018, was $428,009 and $112,894.
| 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 December 31, 2019, the note included principal of $80,000 plus accrued interest of $37,879.
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 one thousand (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 December 31, 2019, the fair value of the preferred shares was $9,600. |
| 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 December 31, 2019 was $427,214.
Promissory Note Payable
The Company issued a promissory note on July 18, 2018 for the sum of $75,000. The principal consisted of $67,500 plus a $7,500 origination fee. The interest rate was sixty-nine percent per annum. The monthly payments were $4,318, and the maturity date of the Note was August 1, 2028. The note was personally guaranteed by the Company’s CEO. As of September 30, 2019, the note was paid in full.
F-24
Loan Payable-Related Party
The Company’s CEO loaned the Company $248,870 as of June 28, 2018. The loans bear interest at various rates to be repaid over a period of three (3) years at various maturity dates. The funds were used for operating expenses. Principal payments were made in the amount of $32,787, leaving a balance of $187,054 as of December 31, 2019.
During the period ended December 31, 2019, the Company recorded interest of $52,877.
| 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 December 31, 2019, the maturities are summarized as follows:
| Capital lease | $ | 26,161 | ||
| Less current portion | 9,088 | |||
| Total long-term liabilities | $ | 17,073 |
Long term maturities for the next three years are as follows:
| Period Ending December 31, | ||||
| 2020 | 9,088 | |||
| 2021 | 9,088 | |||
| 2022 | 7,985 | |||
| $ | 26,161 | |||
| 10. | INCOME TAXES |
On December 22, 2017, the U.S. enacted the Tax Cuts and Jobs Act (the “Act”), which significantly changed U.S. tax law. The Act lowered the Company’s U.S. statutory federal income tax rate from 35% to 21% effective January 1, 2018.
The Company files income tax returns in the U.S. Federal jurisdiction, and the state of California. With few exceptions, the Company is no longer subject to U.S. federal, state and local, or non-U.S. income tax examinations by tax authorities for years before 2016.
Included in the balance at December 31, 2019, are no tax positions for which the ultimate deductibility is highly certain, but for which there is uncertainty about the timing of such deductibility. Because of the impact of deferred tax accounting, other than interest and penalties, the disallowance of the shorter deductibility period would not affect the annual effective tax rate but would accelerate the payment of cash to the taxing authority to an earlier period.
The Company’s policy is to recognize interest accrued related to unrecognized tax benefits in interest expense and penalties in operating expenses. During the periods ended December 31, 2019 and 2018, the Company did not recognize interest and penalties.
At December 31, 2019, the Company had net operating loss carry-forwards of approximately $41,801,640, which expire at dates that have not been determined. No tax benefit has been reported in the December 31, 2019 financial statements since the potential tax benefit is offset by a valuation allowance of the same amount.
F-25
The income tax provision differs from the amount of income tax determined by applying the U.S. federal and state income tax rate to pretax income from continuing operations for the years ended December 31, 2019 and 2018 due to the following:
| 2019 | 2018 | |||||||
| Book loss | $ | (5,764,730 | ) | $ | (2,388,460 | ) | ||
| Tax to book differences for deductible expenses | 11,360 | 11,280 | ||||||
| Tax non deductible expenses | 4,870,700 | 517,000 | ||||||
| Valuation Allowance | 882,680 | 1,860,180 | ||||||
| Income tax expense | $ | - | $ | - | ||||
Deferred taxes are provided on a liability method whereby deferred tax assets are recognized for deductible differences and operating loss and tax credit carry-forwards and deferred tax liabilities are recognized for taxable temporary differences. Temporary differences are the difference between the reported amounts of assets and liabilities and their tax bases. Deferred tax assets are reduced by a valuation allowance when, in the opinion of management, it is more likely than not that some portion or all of the deferred tax assets will not be realized. Deferred tax assets and liabilities are adjusted for the effects of changes in tax laws and rates on the date of enactment.
Net deferred tax liabilities consist of the following components as of December 31,
| 2019 | 2018 | |||||||
| Deferred tax assets: | ||||||||
| NOL carryover | $ | 8,778,350 | $ | 10,277,800 | ||||
| Other carryovers | 728,905 | 704.420 | ||||||
| Deferred tax liabilities: | ||||||||
| Depreciation | (73,755 | ) | (33,120 | ) | ||||
| Less Valuation Allowance | (9,433,500 | ) | (10,949,100 | ) | ||||
| Net deferred tax asset | $ | - | $ | - | ||||
Due to the change in ownership provisions of the Tax Reform Act of 1986, net operating loss carry-forwards for Federal income tax reporting purposes are subject to annual limitations. Should a change in ownership occur, net operating loss carry-forwards may be limited as to use in future years.
| 11. | FOREIGN SUBSIDIARY |
On December 31, 2014, the Company formed a wholly owned subsidiary, OriginClear Technologies Limited (OCT), in Hong Kong, China. The Company granted OCT a master license for the People’s Republic of China. In turn, OCT is expected to license regional joint ventures for water treatment.
| 12. | COMMITMENTS AND CONTINGENCIES |
Operating Lease
The Company holds an agreement for office space located in Los Angeles, California. The initial agreement was from May 1, 2016 to July 31, 2016 and the term has automatically renewed for successive periods and will continue until terminated in accordance with the agreement.
Facility Rental – Related Party
The Company rents from its’ subsidiary on a month-to-month basis a 12,000 square foot facility in McKinney, Texas at a base rent of $4,850 per month.
Warranty Reserve
Generally, a PWT project is guaranteed against defects in material and workmanship for one year from the date of completion, while certain areas of construction and materials may have guarantees extending beyond one year. The Company has various insurance policies relating to the guarantee of completed work, which in the opinion of management will adequately cover any potential claims. A warranty reserve has been provided under PWT based on the opinion of management and based on Company history in the amount of $20,000 for the year ending December 31, 2019.
F-26
Litigation
In February 2019, a Complaint was filed in the Superior Court for the State of California, Case No. 30-2019-01052056-CU-BC-CJC, for breach of contract, common counts for sums due for services allegedly performed, and fraud. The Complaint was filed by RDI Financial, LLC (“RDI”), an assignee of Interdependence, Inc., and named the Company and our developmental subsidiary, WaterChain, Inc., as Defendants. RDI claimed that its assignor, Interdependence, Inc., entered into a contract with the Defendants for Interdependence to provide reputation and professional relationship management services. RDI claimed that Interdependence provided the services and that the Company was required to make certain payments of cash and our capital stock to Interdependence, but did not do so. RDI claims to be entitled to enforce the contract as the assignee, and is demanding monetary damages in the aggregate amount of $630,000.
While filed in February, 2019, the Company and WaterChain were unaware of the suit until September of 2019, when they received notice of a default judgment. Litigation counsel was engaged, the absence of prior notice, service of the suit and an improper default promptly challenged, and in October 2019 the Court vacated the default and judgment, and granted the Company and WaterChain leave to file an Answer and Cross-Complaint. Through these filings, the Company and WaterChain, Inc. contest the allegations and claims in the Complaint, and deny that Interdependence performed the required services and contends that we overpaid Interdependence $40,000 for whatever work was done. Specifically, in November, 2019, an Answer was filed denying the claims in the Complaint, along with a Cross-Complaint alleging fraudulent inducement to enter into the contract, negligent misrepresentations, breach of contract, and to rescind the underlying contract. Specifically, we have alleged that Interdependence misrepresented the nature and scope of the services which were to be provided and ability to provide them, misrepresented the results they would obtain from providing such services, and also failed to provide us with the services as required by the contract such that Interdependence was overpaid based on what it in fact did. For those reasons, and prior to any litigation, we terminated the contract for non-performance.
On February 6, 2020, the Superior Court set April 4, 2021 as the trial date for this matter. The Company and WaterChain are appropriately defending against the allegations and pursuing affirmative recovery on the cross-complaint. The Company disputes all claims and is appropriately litigating its defenses and pursuing recovery on its cross-suit. The parties are in the preliminary stages of settlement negotiations with the Plaintiff RDI and Interdependence, but we can provide no assurance that any settlement will be reached nor can we provide any assurances regarding any terms of such settlement. As of date of this report, legal fees and costs in this action have been substantial and it is impossible at this time to predict an exact amount, or even a meaningful estimate, of the aggregate sums that may be incurred in finally resolving or adjudicating this lawsuit.
| 13. | CONCENTRATIONS |
Major Customers
PWT had four major customers for the year ended December 31, 2019. The customers represented 55.60% of billings for the year ending December 31, 2019. The contract receivable balance for the customers was $174,803 at December 31, 2019.
PWT had four major customers for the year ended December 31, 2018. The customers represented 68.0% of billings for the year ending December 31, 2018. The contract receivable balance for the customers was $210,365 at December 31, 2018.
Major Suppliers
PWT had three major vendors for the year ended December 31, 2019. The vendors represented 36.34% of total expenses in the year ending December 31, 2019. The accounts payable balance due to the vendors was $198,733 at December 31, 2019. Management believes no risk is present with the vendors due to other suppliers being readily available.
PWT had three major vendors for the year ended December 31, 2018. The vendors represented 41.0% of total expenses in the year ending December 31, 2018. The accounts payable balance due to the vendors was $97,974 at December 31, 2018. Management believes no risk is present with the vendors due to other suppliers being readily available.
| 14. | 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 January 3, 2020, and May 14, 2020 holders of convertible promissory notes converted an aggregate principal and interest amount of $94,164 into an aggregate of 2,767,510 shares of the Company’s common stock.
Between January 2, 2020 and April 24, 2020, the Company entered into subscription agreements with certain accredited investors pursuant to which the Company sold an aggregate of 1,160 shares of the Company’s Series K preferred stock for an aggregate purchase price of $1,159,767. The Company also issued an aggregate of 580 shares of its Series L preferred stock to the investors.
Between February 25, 2020 and March 5, 2020, holders of Series L Preferred Stock converted an aggregate of 42.5 Series L shares into an aggregate of 875,238 shares, including make-good shares, of the Company’s common stock.
Between March 5, 2020 and March 25, 2020, holders of Series E Preferred Stock converted an aggregate of 102,436 Series E shares into an aggregate of 30,124 shares, adjusted for the reverse split, of the Company’s common stock.
F-27
Between April 2, 2020 and May 11, 2020, the Company sold an aggregate of 3,904 shares of the Company’s Series M preferred stock for an aggregate purchase price of $97,600.
Between April 15, 2020 and April 30, 2020, holders of Series M Preferred Stock converted an aggregate of 320 Series M shares into an aggregate of 137,052 shares of the Company’s common stock.
Between January 16, 2020 and May 21, 2020, the Company issued to consultants and one employee for performance an aggregate of 1,147,928 shares of the Company’s common stock for services in lieu of cash considerations including 295,141 shares issued in exchange for 6,000,000 shares of Series D-1 preferred stock.
On April 27, 2020, the Company filed a certificate of designation (the “Series O COD”) of Series O Preferred Stock (the “Series O”) and a certificate of designation (the “Series P COD”) of Series P Preferred Stock (the “Series P”) with the Secretary of State of Nevada.
Pursuant to the Series O COD, the Company designated 2,000 shares of preferred stock as Series O. The Series O have a stated value of $1,000 per share, and are entitled to 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 will not be entitled to any voting rights except as may be required by applicable law. The Series O be convertible into common stock of the Company in an amount determined by dividing 200% of the stated value of the Series O 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. 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 O at any time while the Series O are outstanding at a redemption price equal to the stated value plus any accrued but unpaid dividends.
Pursuant to the Series P COD, the Company designated 500 shares of preferred stock as Series P. The Series P have a stated value of $1,000 per share, and are entitled to receive dividends on an as-converted basis with the Company’s common stock. The Series P will vote on an as-converted basis with the common stock, subject, however, to the beneficial ownership limitation set forth in the Series P COD. The Series P are convertible into shares of the Company’s common stock, on the terms and conditions set forth in the Series P COD, which includes certain make-good shares for certain prior investors, and provided that, the Series P 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.
Between May 4, 2020 and May 5, 2020, the Company received loan proceeds in the aggregate amount of $345,000 (the “PPP Loan”) under the Paycheck Protection Program (the “PPP”) under the Coronavirus Aid, Relief and Economic Security Act. The principal and accrued interest under the Note is forgivable after eight weeks if the Company uses the PPP Loan proceeds for eligible purposes, including payroll, benefits, rent and utilities, and otherwise complies with PPP requirements. In order to obtain forgiveness of the PPP Loan, the Company must submit a request and provide satisfactory documentation regarding its compliance with applicable requirements. The Company must repay any unforgiven principal amount of the Note, with interest, on a monthly basis following the Deferral Period. The Company intends to use the proceeds of the PPP Loan specifically for eligible purposes and to pursue forgiveness, although no assurance is provided that forgiveness for all or any portion of the PPP Loan will be obtained.
On May 18, 2020, the Company entered into Restricted Stock Grant Agreements (the “May RSGAs”) with its Chief Executive Officer, T. Riggs Eckelberry, members of the Board, employees and consultants to create management incentives to improve the economic performance of the Company and to increase its value and stock price. All shares issuable under the May RSGAs are performance based shares and none have yet vested nor have any been issued. The May RSGAs provide for the issuance of up to an aggregate of 10,500,000 shares of the Company’s common stock as follows: 2,000,000 to Mr. Eckelberry, 500,000 to each of the other three members of the Board, and an aggregate of 7,000,000 to employees and consultants provided certain milestones are met in certain stages; a) If the Company’s consolidated gross revenue, calculated in accordance with generally accepted accounting principles, consistently applied, equals or exceeds $15,000,000 for the trailing twelve month period, the Company will issue up to an aggregate of 5,250,000 shares of its common stock; b) If the Company’s consolidated operating profit (Operating Profit = Operating Revenue - Cost of Goods Sold - Operating Expenses - Depreciation & Amortization), calculated in accordance with generally accepted accounting principles, equals or exceeds $1,500,000 for the trailing twelve month period as reported as reported in the Company’s SEC Reports, the Company will issue up to an aggregate of 5,250,000 shares of its common stock. As the performance goals are achieved or if alternate vesting is qualified and selected, the shares shall become eligible for vesting and issuance.
F-28
Exhibit 21.1
Subsidiaries of the Registrant
| Name | Jurisdiction of Organization | |
| Progressive Water Treatment, Inc. | Texas |
Exhibit 31
Certifications
I, T Riggs Eckelberry, certify that:
1. I have reviewed this Annual Report on Form 10-K of OriginClear, Inc.;
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. I am 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, including its consolidated subsidiaries, is made known to us by others within those entities, 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. 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 functions):
(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.
| Date: May 29, 2020 | /s/ T Riggs Eckelberry |
| T Riggs Eckelberry | |
| Chief
Executive Officer (Principal Executive Officer), Acting Chief Financial Officer | |
| (Principal Accounting and Financial Officer) |
Exhibit 32
CERTIFICATION PURSUANT TO
18 U.S.C. SECTION 1350,
AS ADOPTED PURSUANT TO
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
In connection with this Annual Report of OriginClear, Inc. (the “Company”) on Form 10-K filed with the Securities and Exchange Commission on the date hereof (the “Report”), I, T Riggs Eckelberry, Chairman, Chief Executive Officer and Acting Chief Financial Officer of the Company, certify, pursuant to 18 U.S.C. § 1350, as adopted pursuant to § 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 Exchange Act of 1934; and
(2) the information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company.
| Date: May 29, 2020 | /s/ T Riggs Eckelberry |
| T Riggs Eckelberry | |
|
Chief Executive Officer Acting Chief Financial Officer (Principal Accounting and Financial Officer) |