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ORIGINCLEAR, INC. - Quarter Report: 2017 March (Form 10-Q)

 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

Form 10-Q

 

(Mark One)

 

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

 

FOR THE QUARTERLY PERIOD ENDED:  March 31, 2017

 

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

 

For the transition period from __________ to __________

 

Commission File Number: ________________

 

ORIGINCLEAR, INC.

(Exact name of registrant as specified in its charter)

 

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

 

525 S. Hewitt St.

Los Angeles, CA 90013

(Address of principal executive offices, Zip Code)

 

(323) 939-6645

(Registrant’s telephone number, including area code)

 

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

 

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

 

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “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 ☒

 

Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date. As of May 15, 2017, there were 38,318,007 shares of common stock, par value $0.0001, issued and outstanding.

 

 

 

 

 

 

TABLE OF CONTENTS

 

    Page
PART I    
     
Item 1. Financial Statements. 2
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations. 16
Item 3. Quantitative and Qualitative Disclosures About Market Risk. 21
Item 4. Controls and Procedures. 21
     
PART II    
     
Item 1. Legal Proceedings. 23
Item 1A. Risk Factors. 23
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds. 23
Item 3. Defaults Upon Senior Securities. 23
Item 4. Mine Safety Disclosures. 23
Item 5. Other Information. 23
Item 6. Exhibits. 23
     
SIGNATURES   24

 

 

 

 

PART I - FINANCIAL INFORMATION

 

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

 

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

 

 1 
 

 

Item 1. Financial Statements

 

ORIGINCLEAR, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS

 

   March 31,
2017
   December 31,
2016
 
    (Unaudited)      
ASSETS          
           
CURRENT ASSETS          
Cash  $442,928   $351,321 
Contracts receivable, less allowance for doubtful accounts of $50,000 and $50,000 respectively   130,269    382,895 
Inventory    13,613    - 
Cost in excess of billing   144,192    47,612 
Work in progress   86,085    86,085 
Prepaid expenses   33,912    42,128 
           
TOTAL CURRENT ASSETS   850,999    910,041 
           
NET PROPERTY AND EQUIPMENT   181,230    161,912 
           
OTHER ASSETS          
Other asset   19,538    19,538 
Goodwill   682,145    682,145 
Trademark   4,467    4,467 
Security deposit   3,500    3,500 
           
TOTAL OTHER ASSETS   709,650    709,650 
           
TOTAL ASSETS  $1,741,879   $1,781,603 
           
LIABILITIES AND SHAREHOLDERS' DEFICIT          
           
Current Liabilities          
Accounts payable and other payable  $585,597   $480,064 
Accrued expenses   735,379    715,281 
Billing in excess of cost   16,327    - 
Customer deposit   113,950    113,950 
Warrant reserve   20,000    20,000 
Deferred income   10,300    - 
Loan payable, current portion   5,978    - 
Derivative liabilities   7,629,986    8,702,083 
Convertible promissory notes, net of discount of $492,237 and $591,835, respectively   289,831    1,935,233 
           
Total Current Liabilities   9,407,348    11,966,611 
           
Long Term Liabilities          
Loan payable, long term portion   25,258    - 
Convertible promissory notes, net of discount of $931 and $11,429, respectively   3,084,069    1,613,571 
           
Total Long Term Liabilities   3,109,327    1,613,571 
           
Total  Liabilities   12,516,675    13,580,182 
           
SHAREHOLDERS' DEFICIT          
Preferred stock, $0.0001 par value, 25,000,000 shares authorized 6,666 shares of Series B issued and outstanding, respectively   1    1 
1,000 shares of Series C issued and outstanding, respectively   -    - 
Common stock, $0.0001 par value, 5,000,000,000 shares authorized 30,506,732 and 21,428,455 shares issued and outstanding, respectively   3,051    2,143 
Preferred treasury stock, 1,000 and 1,000 shares outstanding, respectively   -    - 
Additional paid in capital   52,684,407    51,428,976 
Accumulated other comprehensive loss   (95)   (92)
Accumulated deficit   (63,462,160)   (63,229,607)
           
TOTAL SHAREHOLDERS' DEFICIT   (10,774,796)   (11,798,579)
           
TOTAL LIABILITIES AND SHAREHOLDERS' DEFICIT  $1,741,879   $1,781,603 

 

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

 

 2 
 

 

ORIGINCLEAR, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE THREE MONTHS ENDED MARCH 31, 2017 AND 2016

(Unaudited)

 

   Three Months Ended 
   March 31, 2017   March 31, 2016 
         
Sales  $672,129   $1,467,750 
           
Cost of Goods Sold   582,456    1,068,427 
           
Gross Profit   89,673    399,323 
           
Operating Expenses          
Selling and marketing expenses   512,801    493,510 
General and administrative expenses   624,530    686,846 
Research and development   53,653    210,150 
Depreciation and amortization expense   13,600    11,239 
           
Total Operating Expenses   1,204,584    1,401,745 
           
Loss from Operations   (1,114,911)   (1,002,422)
           
OTHER INCOME (EXPENSE)          
Fair value of debt financing cost   -    (52,759)
Gain on net change in derivative liability   1,072,096    2,599,198 
Interest expense   (189,738)   (202,016)
           
TOTAL OTHER INCOME (EXPENSE)   882,358    2,344,423 
           
           
NET (LOSS) INCOME  $(232,553)  $1,342,001 
           
BASIC AND DILUTED (LOSS) EARNING PER SHARE ATTRIBUTABLE TO SHAREHOLDERS'  $(0.01)  $0.18 
           
WEIGHTED-AVERAGE COMMON SHARES OUTSTANDING, BASIC AND DILUTED   25,082,031    7,348,638 

 

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

 

 3 
 

 

ORIGINCLEAR, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENT OF SHAREHOLDERS' DEFICIT
FOR THE THREE MONTHS ENDED MARCH 31, 2017

 

                   Additional   Accumulated
Other
         
   Preferred stock   Common stock   Paid-in  

Comprehensive

   Accumulated     
   Shares   Amount   Shares   Amount   Capital   loss   Deficit   Total 
Balance at December 31, 2016   7,666   $1    21,428,454   $2,143   $51,428,976   $(92)  $(63,229,607)  $(11,798,579)
                                         
Common stock issuance  for cash   -    -    2,420,000    242    423,258    -    -    423,500 
                                         
Common stock issuance for conversion of debt   -    -    3,207,139    321    243,891    -    -    244,212 
                                         
Common stock issuance for settlement of accounts payable   -    -    886,700    89    89,911    -    -    90,000 
                                         
Common stock issued at fair value for services   -    -    2,564,439    256    463,771    -    -    464,027 
                                         
Stock compensation cost   -    -    -    -    34,600    -    -    34,600 
                                         
Other comprehensive loss   -    -    -    -    -    (3)   -    (3)
                                         
Net loss for the three months ended March 31, 2017   -    -    -    -    -    -    (232,553)   (232,553)
                                         
Balance at March 31, 2017 (unaudited)   7,666   $1    30,506,732   $3,051   $52,684,407   $(95)  $(63,462,160)  $(10,774,796)

  

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

 

 4 
 

 

ORIGINCLEAR, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(Unaudited)

 

   Three Months Ended 
   March 31, 2017   March 31, 2016 
CASH FLOWS FROM OPERATING ACTIVITIES:          
Net loss  $(232,553)  $1,342,001 
Adjustment to reconcile net loss to net cash used in operating activities          
Depreciation and amortization   13,600    11,239 
Common stock and warrants issued for services   464,027    293,980 
Stock option and warrant compensation expense   34,600    52,296 
Gain on net change in valuation of derivative liability   (1,072,097)   (2,546,439)
Debt discount and original issue discount  recognized as interest expense   110,097    120,816 
Change in Assets (Increase) Decrease in:          
Contracts receivable   252,626    (110,769)
Cost in excess of billing   (96,580)   (157,357)
Inventory asset   (13,613)   - 
Prepaid expenses   8,216    428 
Other asset   -    42 
Change in Liabilities Increase (Decrease) in:          
Accounts payable   105,533    299,036 
Accrued expenses   69,309    105,537 
Billing in excess of cost   16,327    49,100 
Deferred income   10,300    - 
           
NET CASH USED IN OPERATING ACTIVITIES   (330,208)   (540,090)
           
CASH FLOWS FROM INVESTING ACTIVITIES:          
Purchase of fixed assets   (32,918)   (5,699)
           
CASH (USED IN) INVESTING ACTIVITIES   (32,918)   (5,699)
           
CASH FLOWS FROM FINANCING ACTIVITIES:          
Loan payable   31,236    - 
Proceeds from convertible promissory notes   -    100,000 
Proceeds for issuance of common stock for cash   423,500    - 
           
NET CASH PROVIDED BY FINANCING ACTIVITIES   454,736    100,000 
           
Foreign currency effect on cash flow   (3)   - 
           
NET INCREASE (DECREASE) IN CASH   91,607    (445,789)
           
CASH BEGINNING OF PERIOD   351,321    695,295 
           
CASH END OF PERIOD  $442,928   $249,506 
           
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION          
Interest paid  $1,258   $366 
Taxes paid  $-   $- 
           
SUPPLEMENTAL DISCLOSURES OF NON CASH TRANSACTIONS          
Conversion of accounts payable into a convertible note  $-   $430,896 
Beneficial conversion feature on convertible note  $-   $16,771 
Common stock issued for supplemental shares  $44,440   $- 
Common stock issued for conversion of debt and accrued interest  $244,212   $426,114 
Common stock issued for settlement of accounts payable  $90,000   $- 
Change in derivative liability on Series B preferred stock  $-   $123,110 

 

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

 

 5 
 

  

ORIGINCLEAR, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - UNAUDITED

MARCH 31, 2017

 

1. The accompanying unaudited condensed financial statements of OriginClear, Inc. (the “Company”) (formerly OriginOil, Inc.) have been prepared in accordance with accounting principles generally accepted in the United States of America for interim financial information and with the instructions to Form 10-Q and Rule 10-01 of Regulation S-X.  Accordingly, they do not include all of the information and footnotes required by generally accepted accounting principles for complete financial statements. In the opinion of management, all normal recurring adjustments considered necessary for a fair presentation have been included.  Operating results for the three months ended March 31, 2017 are not necessarily indicative of the results that may be expected for the year ending December 31, 2017.  For further information refer to the financial statements and footnotes thereto included in the Company's Form 10-K for the year ended December 31, 2016.

 

Going Concern

 

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

 

2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICES

 

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

 

Principles of Consolidation

 

The accompanying consolidated financial statements include the accounts of OriginClear, Inc. and its wholly owned operating subsidiaries, Progressive Water Treatment, Inc., and OriginClear (HK) Company, Ltd. All material intercompany transactions have been eliminated upon consolidation of these entities.

 

Loss per Share Calculations

 

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

 

The Company has excluded 3,697,495 of stock options, 506,026 warrants, and the shares issuable from convertible debt of $3,867,068 and shares issuable from convertible preferred stock for the three months ended March 31, 2017, because their impact on the loss per share is anti-dilutive.

 

The Company has excluded 3,411,561 stock options, 653,851 warrants, and the shares issuable from convertible debt of $4,582,068 and shares issuable from convertible preferred stock for the for the three months ended March 31, 2016, because their impact on the earnings per share is anti-dilutive.

 

Work-in-Process

 

The Company recognizes as an asset the accumulated costs for work-in-process on projects expected to be delivered to customers. Work in Process includes the cost price of materials and labor related to the construction of equipment to be sold to customers.

 

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.

 

 6 
 

 

ORIGINCLEAR, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - UNAUDITED

MARCH 31, 2017

 

2.   SUMMARY OF SIGNIFICANT ACCOUNTING POLICES (Continued)

 

Revenue Recognition

 

Equipment sales

 

We recognize revenue upon delivery of equipment, provided that evidence of an arrangement exists, title, and risk of loss have passed to the customer, fees are fixed or determinable, and collection of the related receivable is reasonably assured.  Title to the equipment is transferred to the customer once the last payment is received. We record revenue as goods are shipped, and the equipment has been fully accepted by the customer. Generally, we extend credit to our customers and do not require collateral.  We do not ship a product until we have a purchase agreement signed by the customer with a payment arrangement.  

 

Percentage of completion

 

Revenues and related costs on construction contracts are recognized using the “percentage of completion method” of accounting in accordance with ASC 605-35 – “Accounting for Performance of Construction-Type and Certain Production Type Contracts”. Under this method, contract revenues and related expenses are recognized over the performance period of the contract in direct proportion to the costs incurred as a percentage of total estimated costs for the entirety of the contract. Costs include direct material, direct labor, subcontract labor and any allocable indirect costs. All un-allocable indirect costs and corporate general and administrative costs are charged to the periods as incurred. However, in the event a loss on a contract is foreseen, the Company will recognize the loss as it is determined.

 

The asset “Costs in excess of billings” represents revenues recognized in excess of amounts billed on contracts in progress. The liability “Billings in excess of costs” represents billings in excess of revenues recognized on contracts in progress. Assets and liabilities related to long-term contracts are included in current assets and current liabilities in the accompanying balance sheets, as they will be liquidated in the normal course of the contract completion. The cost in excess of billings for the three months ending March 31, 2017 and 2016, were $144,192 and $174,105, respectively. The billing in excess of cost was for the three months ending March 31, 2017 and 2016, was $16,327 and $552,818, respectively.

 

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

 

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

 

Contract Receivable

 

The Company bills its customers in accordance with contractual agreements. The agreements generally require billing to be on a progressive basis as work is completed. Credit is extended based on evaluation of clients financial condition and collateral is not required. The Company maintains an allowance for doubtful accounts for estimated losses that may arise if any customer is unable to make required payments. Management performs a quantitative and qualitative review of the receivables past due from customers on a monthly basis. The Company records an allowance against uncollectible items for each customer after all reasonable means of collection have been exhausted, and the potential for recovery is considered remote. The allowance for doubtful accounts was approximately $50,000 as of March 31, 2017 and December 31, 2016, respectively. The net contract receivable balance was $130,269 and $382,895 at March 31, 2017 and December 31, 2016, respectively.

 

Fair Value of Financial Instruments

 

Fair Value of Financial Instruments, requires disclosure of the fair value information, whether or not recognized in the balance sheet, where it is practicable to estimate that value. As of March 31, 2017, the balances reported for cash, contract receivables, cost in excess of billing, prepaid expenses, accounts payable, billing in excess of cost, and accrued expenses approximate the fair value because of their short maturities.

 

We adopted ASC Topic 820 for financial instruments measured as fair value on a recurring basis. ASC Topic 820 defines fair value, established a framework for measuring fair value in accordance with accounting principles generally accepted in the United States and expands disclosures about fair value measurements.

 

Fair value is defined as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. ASC Topic 820 established a three-tier fair value hierarchy which prioritizes the inputs used in measuring fair value. The hierarchy gives the highest priority to unadjusted quoted prices in active markets for identical assets or liabilities (level 1 measurements) and the lowest priority to unobservable inputs (level 3 measurements). These tiers include:

 

·   Level 1, defined as observable inputs such as quoted prices for identical instruments in active markets;

 

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ORIGINCLEAR, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - UNAUDITED

MARCH 31, 2017

 

2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICES (Continued)

 

·  

Level 2, defined as inputs other than quoted prices in active markets that are either directly or indirectly observable such as quoted prices for similar instruments in active markets or quoted prices for identical or similar instruments in markets that are not active; and

 

·  

Level 3, defined as unobservable inputs in which little or no market data exists, therefore requiring an entity to develop its own assumptions, such as valuations derived from valuation techniques in which one or more significant inputs or significant value drivers are unobservable. 

 

The following table presents certain investments and liabilities of the Company’s financial assets measured and recorded at fair value on the Company’s balance sheets on a recurring basis and their level within the fair value hierarchy as of March 31, 2017.

 

     Total   (Level 2)   (Level 2)   (Level 3) 
                   
  Derivative Liability  $7,629,986   $-   $-   $7,629,986 
                       
  Total liabilities measured at fair value  $7,629,986   $-   $-   $7,629,986 

 

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, 2017  $8,702,083 
  Fair Value of derivative liabilities issued   - 
  Gain on conversion of debt and change in derivative liability   (1,072,097)
  Balance as of March 31, 2017   7,629,986 

 

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:

 

      03/31/2017 
  Risk free interest rate   .01% - 1.02% 
  Stock volatility factor   4.72% - 189.09% 
  Weighted average expected option life   6 months - 5 years 
  Expected dividend yield   None 

 

Segment Reporting

 

The Company’s business currently operates in one segment based upon the Company’s organizational structure and the way in which the operations are managed and evaluated.

 

Recently Issued Accounting Pronouncements

 

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

 

In August 2016, the FASB issued ASU No. 2016-15 which amends ASC Topic 230, “Classification of Certain Cash Receipts and Cash Payments.” The amendments in this Update address eight specific cash flow issues with the objective of reducing the existing diversity in practice. The update outlines the classification of specific transactions as either cash inflows or outflows from financing activities, operating activities, investing activities or non-cash activities. This guidance is effective for interim and annual reporting periods beginning after December 15, 2017. We are evaluating what impact, if any, the adoption of this guidance will have on our financial condition, results of operations, cash flows or financial disclosures.

 

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

 

 8 
 

 

ORIGINCLEAR, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - UNAUDITED

MARCH 31, 2017

 

3. CAPITAL STOCK

 

Preferred Stock

 

Series A

 

On March 30, 2017, the Board of Directors of the Company authorized the withdrawal of the Series A preferred stock. As of March 31, 2017, no shares of Series A preferred stock were outstanding.

 

Series B

 

On October 1, 2015, the Company filed a Certificate of Designation for Series B preferred stock with the Secretary of State of Nevada and the shares of Series B preferred stock were issued to the shareholders of Progressive Water Treatment, Inc. in connection with the share exchange agreement. One third (1/3) of the shares received by the holder may be converted into common stock beginning one (1) year after the first date on which a share of Series B Preferred Stock was issued (the “Original Issue Date); one third (1/3) may be converted beginning two (2) years after the Original Issue Date; and the remaining one third (1/3) may be converted beginning three years after the Original Issue Date. The number of shares of common stock issuable for each share of converted Series B preferred stock shall be calculated by dividing the stated value by the market price, the market price shall be the average of the closing trade prices of the twenty-five (25) days prior to the date of the conversion notice. On August 12, 2016, the agreement was amended to include make-good-shares. The conversion price set forth in Section 1.2 of the agreement shall be adjusted to reflect the lower of $1.05 or the price of the Company’s common stock calculated using the average closing prices of the Company’s common

 

 9 
 

 

ORIGINCLEAR, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - UNAUDITED

MARCH 31, 2017

 

3. CAPITAL STOCK (Continued)

 

Preferred Stock (Continued)

 

Series B (Continued)

 

stock on the last three (3) trading days prior to the date of conversion, provided, however, if the Average Closing Price is less than $0.35 per share, the adjusted conversion price shall be $0.35 per share. See Note 3. The conversion price is subject to adjustment in the case of reverse splits, stock dividends, reclassifications and the like. In addition, the conversion price is subject to certain full ratchet anti-dilution protection. Accordingly, the preferred stock is valued under the provision of ASC Topic 815, Derivatives and Hedging, because the conversion feature of the preferred stock was not afforded the exemption for conventional convertible instruments due to its variable conversion rate. The Series B preferred stock shall have the rights, preferences and privileges as set forth in the exchange agreement. As of March 31, 2017, there are 6,666 shares of Series B preferred stock outstanding.

 

Series C

 

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

 

Common Stock

 

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

 

Three months ended March 31, 2017

 

The Company issued 2,420,000 shares of common stock through a private placement at a price of $0.175 per share for cash in the amount of $423,500.

 

The Company issued 3,207,139 shares of common stock for the settlement of convertible promissory notes in an aggregate principal in the amount of $195,000, plus interest in the amount of $49,212, based upon conversion prices of $0.0613 to $0.084.

 

The Company issued 886,700 shares of common stock for the settlement of accounts payable with a fair value of $90,000.

 

The Company issued 2,564,439 shares of common stock for services at fair value of $464,027.

 

4. CONVERTIBLE PROMISSORY NOTES

 

On various dates the Company entered into unsecured convertible notes (the “Convertible Promissory Notes” or “Notes”), that matured during the period and were extended sixty (60) days from the effective date of each Note. The Notes bear interest at 10% per annum. The Notes may be converted into shares of the Company’s common stock at conversion prices ranging from the lesser of $2.10 to $4.90 (subject to adjustment for stock splits, dividends, combinations and other similar transactions) or 50% of the lowest trade price on any trade day following issuance of the Notes.  In addition, for as long as the Notes or other convertible notes in effect between the purchaser and the Company are outstanding, if the Company issues any security with terms more favorable than the terms of the Notes or such other convertible notes or a term was not similarly provided to the purchaser of the Notes or such other convertible notes, then such more favorable or additional term shall, at the purchaser’s option, become part of the Notes and such other convertible notes. The conversion feature of the Notes was considered a derivative in accordance with current accounting guidelines because of the reset conversion features of the Notes. During the three months ended March 31, 2017, the Company issued 3,207,141 shares of common stock, upon conversion of $195,000 in principal, plus accrued interest of $49,212. As of March 31, 2017, the Notes had an aggregate remaining balance of $1,760,000.

 

 10 
 

 

ORIGINCLEAR, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - UNAUDITED

MARCH 31, 2017

 

4. CONVERTIBLE PROMISSORY NOTES (Continued)

 

As of March 31, 2017, unsecured convertible promissory notes (the “OID Notes”) had an aggregate remaining principal balance of $170,790, plus accrued interest of $13,334 were amended. The OID Notes included an original issue discount and one time interest, which has been fully amortized. The OID Notes were extended through December 31, 2017. The OID Notes were convertible into shares of the Company’s common stock at a conversion price initially of $15.31. After the amendment, the conversion price changed to the lesser of $2.80 per share, or b) fifty percent (50%) of the lowest trade price of common stock recorded since the original effective date of this note, or c) the lowest effective price per share granted to any person or entity after the effective date.  The conversion feature of the notes was considered a derivative in accordance with current accounting guidelines, because of the reset conversion features of the notes.

 

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

 

The Company issued a convertible note in exchange for an accounts payable in the amount of $432,048, which could be converted into shares of the Company’s common stock after December 31, 2015. The note was accounted for under ASC 470, whereby, a beneficial conversion feature was recorded at time of issuance. The note did not meet the criteria of a derivative, and was accounted for as a beneficial conversion feature, which was amortized over the life of the note and recognized as interest expense in the financial statements. On January 1, 2016, the note meet the criteria of a derivative and was accounted for under ASC 815. The note has zero stated interest rate, and the conversion price shall be equal to 75% of the average three lowest last sale prices traded during the 25 trading days immediately prior to conversion. As of December 31, 2016, the remaining balance was $257,048. During the three months ended March 31, 2017, the Company issued 886,700 shares of common stock upon conversion of principal in the amount of $90,000, leaving a balance of $167,048. The Company recorded amortization of debt discount, which was recognized as interest expense in the amount of $53,266 during the three months ended March 31, 2017. 

 

The Company issued a convertible note in exchange for an accounts payable in the amount of $430,896, which could be converted into shares of the Company’s common stock after September 15, 2016. The note was accounted for under ASC 470, whereby, a beneficial conversion feature was recorded at time of issuance. On September 15, 2016, the note met the criteria of a derivative and was accounted for under ASC 815. The note has zero stated interest rate, and the conversion price shall be equal to 75% of the average three lowest last sale prices traded during the 25 trading days immediately prior to conversion. The note did not meet the criteria of a derivative at the time it was entered into and was accounted for as a beneficial conversion feature, which was amortized over the life of the note and recognized as interest expense in the financial statements. The conversion feature of the Note was considered a derivative in accordance with current accounting guidelines because of the reset conversion feature of the Note. The Company recorded amortization of debt discount, which was recognized as interest expense in the amount of $46,333 during the three months ended March 31, 2017.

 

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

 

The derivative liability recognized in the financial statements as of March 31, 2017 was $7,629,986.

 

5. OPTIONS AND WARRANTS

 

Options

 

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

 

 11 
 

 

ORIGINCLEAR, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - UNAUDITED

MARCH 31, 2017

 

5. OPTIONS AND WARRANTS (Continued)

 

Options (Continued)

 

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

 

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

 

During the year ended December 31, 2016, the Company granted 31,429 shares of incentive stock options to employees, and 428,571 shares of non-statutory options to consultants. Each option shall be exercisable to the nearest whole share, in installments or otherwise, as the respective option agreements may provide. The stock options mature on March 29, 2021 and October 17, 2021, at prices of $0.29 and $1.31.

 

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

 

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

 

     March 31, 2017 
         Weighted 
     Number of   average exercise 
     Options   price 
  Outstanding, beginning of period   3,697,495   $1.505 
  Granted   -    - 
  Exercised   -    - 
  Forfeited/Expired   -    - 
  Outstanding, end of period   3,697,495   $1.505 
  Exercisable at the end of the period   2,641,304   $1.190 
  Weighted average fair value of options granted during the period       $- 

 

The weighted average remaining contractual life of options outstanding issued under the 2009 Plan, 2012 Plan, and 2013 Plan as of March 31, 2017 was as follows:

 

              Weighted Average 
      Stock   Stock   Remaining 
  Exercisable   Options   Options   Contractual 
  Prices   Outstanding   Exercisable   Life (years) 
  $           6.65 - 147.00    52,276    49,954    5.34 - 7.52 
  $         10.15 - 15.40    32,362    32,362    6.46 
  $1.31    3,612,857    2,558,988    3.52 - 4.55 
        3,697,495    2,641,304      

 

Stock-based compensation expense recognized during the year is based on the value of the portion of stock-based payment awards that is ultimately expected to vest. Stock-based compensation expense recognized in the financial statements of operations during the three months ended March 31, 2017 and 2016 were $34,600 and $52,296, respectively.

 

 12 
 

 

ORIGINCLEAR, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - UNAUDITED

MARCH 31, 2017

 

5. OPTIONS AND WARRANTS (Continued)

 

Restricted Stock to CEO

 

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

 

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

 

Restricted Stock to Employees and Consultants

 

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

 

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

 

On August 10, 2016, the Company entered into a Restricted Stock Grant Agreement (the “Consultants RSGA”) with two of its’ consultants, to create management incentives to improve the economic performance of the Company and to increase its value and stock price. All shares issuable under the Consultants RSGA are performance based shares and none have yet vested nor have any been issued. The Consultants RSGA provides to each of the consultants the issuance of up to 285,714 shares of the Company’s common stock provided certain milestones are met in certain stages; a) If the Company’s consolidated gross revenue, calculated in accordance with generally accepted accounting principles, consistently applied, equals or exceeds $15,000,000 for the trailing twelve month period, the Company will issue to each of the consultants up to 142,857 shares of its common stock; b) If the Company’s consolidated operating profit (Operating Profit = Operating Revenue - Cost of Goods Sold - Operating Expenses - Depreciation & Amortization), calculated in accordance with generally accepted accounting principles, equals or exceeds $1,500,000 for the trailing twelve month period as reported as reported in the Company’s SEC Reports, the Company will issue up to 142,857 shares to each of

 

 13 
 

 

ORIGINCLEAR, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - UNAUDITED

MARCH 31, 2017

 

5. OPTIONS AND WARRANTS (Continued)

 

Restricted Stock to Employees and Consultants

 

the consultants, its common stock. The Company has not recognized any costs associated with the milestones, due to not being able to estimate the probability of it being achieved. As the performance goals are achieved, the shares shall become eligible for vesting and issuance.

 

Warrants

 

During the three months ended March 31, 2017, no warrants were issued by the Company. A summary of the Company’s warrant activity and related information follows for the three months ended March 31, 2017:

  

     March 31, 2017 
         Weighted 
     Number   average 
     of   exercise 
     Warrants   price 
  Outstanding -beginning of the period   506,026   $5.25 
  Granted   -    - 
  Exercised   -    - 
  Forfeited   -    - 
  Outstanding - end of the period   506,026   $5.25 

 

At March 31, 2017, the weighted average remaining contractual life of warrants outstanding:

 

              Weighted 
              Average 
              Remaining 
  Exercisable   Warrants   Warrants   Contractual 
  Prices   Outstanding   Exercisable   Life (years) 
  $              5.25 - 22.75    479,121    479,121    0.24 - 1.20 
  $              8.75 - 61.25    2,857    2,857    5.63 
  $31.50    24,048    24,048    0.07 - 1.47 
        506,026    506,026      

 

At March 31, 2017, the aggregate intrinsic value of the warrants outstanding was $506,026.

 

6. FOREIGN SUBSIDIARY

 

On December 31, 2014, the Company formed a wholly owned subsidiary, OriginClear (HK) Company, Ltd (OCHK), in Hong Kong, China. The Company has granted OCHK a master license for the People’s Republic of China, and a non-exclusive license for the rest of Asia. In turn, OCHK is expected to license regional joint ventures for the commercial development of EWS:AOx Technology. A research and manufacturing center are also planned.

 

7. COMMITMENTS AND CONTINGENCIES

  

Operating Lease – Related Party

 

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

 

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 as of March 31, 2017.

 

 14 
 

 

ORIGINCLEAR, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - UNAUDITED

MARCH 31, 2017

  

8. 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:

 

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

 

Between April 12, 2017 and May 11, 2017, the Company sold, in a private placement, an aggregate of 1,562,862 shares of its common stock to accredited investors for an aggregate consideration of $273,500 (the “Offering”). The shares issued in this Offering are subject to price protection for a period of one year from the issuance of the shares providing that under certain circumstances, the Company will issue additional shares of common stock of the Company for no additional consideration to the subscribers thereunder. The subscribers agreed to a lock-up provision, under which subject to certain terms and conditions therein, the subscribers shall not sell any of their shares of common stock of the Company obtained in this Offering for a period of twelve months.

 

On April 19, 2017, holders of convertible promissory notes converted an aggregate principal and interest amount of $57,021 into an aggregate of 1,267,123 shares of the Company’s common stock.

 

In connection with certain one-time make good agreements, on April 28, 2017, the Company issued an aggregate of 51,582 shares of its common stock to certain holders of its common stock.

 

Due to the reverse split effective on April 12, 2017, the Company included 5,117 shares of common stock as a rounding adjustment.

 

Between April 28, 2017 and May 15, 2017, the Company issued to consultants for services, including investor relations services, an aggregate of 4,924,591 shares of the Company’s common stock in lieu of cash consideration. 

 

On May 12, 2017, the Company’s Board of Directors approved the issuance of an aggregate of 300,000 shares of the Company’s common stock for services.

 

 15 
 

  

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

 

This Form 10-Q contains forward-looking statements that are subject to a number of risks and uncertainties, many of which are beyond our control, which may include statements about our:

 

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

 

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

 

Organizational History

 

OriginClear, Inc. (“we”, “us”, “our”, the “Company” or “OriginClear”) was incorporated on June 1, 2007 under the laws of the State of Nevada.  We have been engaged in business operations since June 2007. We recently moved into the commercialization phase of our business plan having been primarily involved in research, development and licensing activities. Our principal offices are located at 525 S. Hewitt St., Los Angeles, California 90013. Our main telephone number is (323) 939-6645. Our website address is www.OriginClear.com.  In addition to announcing material financial information through our investor relations website, press releases, SEC filings and webcasts, we also intend to use the following social media channels as a means of disclosing information about our products, our planned financial and other announcements, our attendance at upcoming investor and industry conferences, and other matters and for complying with our disclosure obligations under Regulation FD:

 

  OriginClear’s Twitter Account (https://twitter.com/OriginClear)
     
  OriginClear’s Facebook Page (https://www.facebook.com/OriginClear)

 

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.

 

 16 
 

  

Overview of Business

 

OriginClear is a leading provider of water treatment solutions and the developer of a breakthrough water cleanup technology. Through its wholly owned subsidiaries, OriginClear provides systems and services to treat water in a wide range of industries, such as municipal, pharmaceutical, semiconductors, industrial, and oil & gas. To rapidly grow this segment of the business, we strategically acquire profitable and well-managed water treatment companies, which allow us to expand our global market presence and technical expertise. To enable a new era of clean and socially responsible water treatment solutions, we invented Electro Water Separation™, a breakthrough high-speed water cleanup technology using multi-stage electrochemistry, that we license worldwide to water treatment equipment manufacturers. Water is our most valuable resource, and the mission of The OriginClear Group™ (the “Group”) is to improve the quality of water and help return it to its original and clear condition.

 

The Group

 

Outsourcing is a fast-growing reality in water treatment. Tougher regulations, water scarcities and general outsourcing trends are driving industrial and agricultural water treatment users to delegate their water problem to service providers. As Global Water Intelligence pointed out in their report on October 30, 2015, “Water is often perceived as a secondary importance, with end-users increasingly wanting to focus solely on their own core business. This is driving a move away from internal water personnel towards external service experts to take control of water aspects.” External service experts are typically small–privately owned and locally operated. Consolidating these companies could lead to enormous economies of scale through sharing of best practices, technologies, and customers. Decentralization is an even greater trend in water, similar to what has been seen in energy decentralization through solar and wind off-grid generation. ​ Water is becoming increasingly scarcer. ​McKinsey’s Transforming ​Water Economies ​forecasts that ​“without ​action, global ​water demand ​could outstrip ​supply by up to ​40 percent by ​2030.” ​Furthermore, existing water infrastructure in the United States is aging and water loss is increasing. According to ​Lux Research, ​updating our ​national water ​infrastructure ​will require an ​investment of $270 billion, money ​that will be ​hard to pull ​together for ​projects that ​could take ​decades to ​complete. ​In the meantime, centralized water systems are forcing water users to treat their own water with small, modular ​water treatment ​systems. OriginClear is acquiring companies to help industrial water users treat their ​water ​themselves, and often reuse ​it. We believe ​those companies ​are going to ​grow tremendously ​because of this ​“local ​water” ​growth trend. ​We believe that assembling a group of water treatment companies is an opportunity for significant growth and increased Company value for the stockholders.

  

Progressive Water Treatment

 

On October 1, 2015, Dallas-based Progressive Water Treatment, Inc. (“PWT”) became the first company in the Group. PWT is profitable and is a fast-growing designer, builder and service provider for a wide range of industrial water treatment applications. PWT reported revenue of $4,794,637 for the period ending December 31, 2016. For the first three months of 2017, PWT reported revenue of $662,129 which is included in the consolidated financial statements ending March 31, 2017.

 

PWT’s Business

 

Since 1995, PWT has been designing and manufacturing a complete line of water treatment systems for municipal, industrial and pure water applications. Known as an OEM (Original Equipment Manufacturer), PWT utilizes a wide range of technologies, including chemical injection, media filters, membrane, ion exchange and SCADA technology, in turnkey systems that it designs and builds. PWT also offers a broad range of services including maintenance contracts, retrofits and replacement assistance. In addition, PWT rents equipment through contracts of varying duration. Customers are primarily served in the United States and Canada, with PWT’s reach extending worldwide from Japan to Argentina to the Middle East.

 

OriginClear is currently in discussions for additional, accretive acquisitions of companies specializing in complementary markets and applications.

 

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Technology Licensing

 

For its first eight years of operations, OriginClear focused uniquely on development and commercialization of its breakthrough Electro Water Separation™ technology. In 2015, the technology went into commercial phase, and the Company launched it as OriginClear Technologies, operating in parallel to the Group. The mission of OriginClear Technologies is to develop Electro Water Separation™ and achieve its full recognition as an international industry standard in treating our increasingly complex wastewater treatment challenges. For this purpose, OriginClear Technologies relies on an ongoing strong R&D and engineering activity for the development of its technology, while actively building its network of partners, licensees and joint venture partners for commercial development. A key element of this strategy is OriginClear (HK), OriginClear’s wholly-owned subsidiary in Hong Kong that manages Asia-Pacific market development, with a special focus on China sales and manufacturing. While OriginClear Technologies focuses on developing and monetizing the Company’s internally-developed Intellectual Property, best practices and trade secrets, it is expected to do the same for technologies which may result in future from the Group’s acquisition of profitable water treatment companies.

 

The Technology

 

OriginClear is the proprietary developer of Electro Water Separation™ (EWS), the high-speed, primarily chemical-free technology to clean up large quantities of water. It removes oils, suspended solids, certain dissolved solids, and pathogens, in a continuous and energy-efficient process. The Company originally developed this technology to solve the challenge of removing microalgae from a highly dilute state. The EWS technology remains the most efficient non-chemical, continuous mechanism for the concentration of live algae cells from water. The electro-chemical process was then extended, first to cleaning up oil and gas waste water and most recently, to industrial, agricultural and urban effluents. These water treatment applications are entirely electrochemical in nature and do not rely on algae for its cleaning capabilities, which is a separate application of the technology. EWS is designed to be an early step in removal of oils, solids and pathogens; reducing the work that more expensive, downstream processes such as Ultra Filtration or Reverse Osmosis must do, therefore enabling more cost-efficient and high-volume water cleanup overall. 

   

In March of 2016, OriginClear announced that it had successfully developed and proved Advanced Oxidation for its breakthrough water cleanup system, Electro Water Separation™, or EWS. University laboratory tests have shown that EWS with Advanced Oxidation (EWS:AOx™) can now extract dissolved contaminants, which are otherwise difficult to remove without chemicals such as chlorine. Overall, the system has shown a dramatic reduction in Total Organic Compounds which includes all forms of organic contamination, solids, miscible or dissolved, to meet new stringent global discharge requirements. Even prior to this innovation, EWS, combined with an iSep ultrafiltration membrane, demonstrated up to a 99.9% removal of dispersed oil, 99.5% removal of suspended solids as well as successful treatment of chemical oxygen demand (COD), including specific contaminants such as ammonia, phosphorus and hydrogen sulfide. These results were presented at the International Water Conference in 2015. In 2016, OriginClear filed for a patent to protect the new AOx process and system configuration.

 

Today, we are capable of pairing the two technologies as EWS:AOx™, or separately, as the application requires. OriginClear believes that its technology is valuable to the industry because it has the potential to greatly extend the life of membranes and filters by effectively treating very dirty, oily water, while reducing chemical use significantly. OriginClear also believes that its Advanced Oxidation technology will help neutralize harmful micro-contaminants, such as industrial solvents, which is difficult or impossible to achieve with other technologies. Overall, the system has shown a dramatic reduction in Total Organic Compounds which includes all forms of organic contamination, solids, miscible or dissolved, to meet new stringent global discharge requirements.

 

Recently, with our initial commercial contract for a landfill upgrade in Malaysia, we have shown that our systems can be retrofitted into existing installations, avoiding the time and expense of ground-up construction and enabling rapid compliance with new, stringent discharge regulations for treatment companies.

  

Critical Accounting Policies

 

The Securities and Exchange Commission ("SEC") defines "critical accounting policies" as those that require application of management's most difficult, subjective or complex judgments, often as a result of the need to make estimates about the effect of matters that are inherently uncertain and may change in subsequent periods. Not all of the accounting policies require management to make difficult, subjective or complex judgments or estimates. However, the following policies could be deemed to be critical within the SEC definition. 

  

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Revenue Recognition

 

Equipment sales

 

We recognize revenue upon delivery of equipment, provided that evidence of an arrangement exists, title, and risk of loss have passed to the customer, fees are fixed or determinable, and collection of the related receivable is reasonably assured.  Title to the equipment is transferred to the customer once the last payment is received. We record revenue as goods are shipped, and the equipment has been fully accepted by the customer. Generally, we extend credit to our customers and do not require collateral.  We do not ship a product until we have a purchase agreement signed by the customer with a payment arrangement.  

 

Percentage of completion

 

Revenues and related costs on construction contracts are recognized using the “percentage of completion method” of accounting in accordance with ASC 605-35 – “Accounting for Performance of Construction-Type and Certain Production Type Contracts”. Under this method, contract revenues and related expenses are recognized over the performance period of the contract in direct proportion to the costs incurred as a percentage of total estimated costs for the entirety of the contract. Costs include direct material, direct labor, subcontract labor and any allocable indirect costs. All un-allocable indirect costs and corporate general and administrative costs are charged to the periods as incurred. However, in the event a loss on a contract is foreseen, the Company will recognize the loss as it is determined.

 

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 amounts reported in the accompanying financial statements. Significant estimates made in preparing these financial statements include the estimate of useful lives of property and equipment, the deferred tax valuation allowance, and the fair value of stock options, warrants, convertible notes and common stock for services. Actual results could differ from those estimates.

 

Fair Value of Financial Instruments

 

Fair value of financial instruments requires disclosure of the fair value information, whether or not recognized in the balance sheet, where it is practicable to estimate that value. As of March 31, 2017, the amounts reported for cash, prepaid expenses, accounts payable and accrued expenses approximate the fair value because of their short maturities.

  

Recently Issued Accounting Pronouncements

 

Management reviewed accounting pronouncements issued during the three months ended March 31, 2017, and no pronouncements were believed by management to have a material impact on our present or future financial statements.

  

Results of Operation

 

Results of Operations for the three months ended March 31, 2017 compared to the three months ended March 31, 2016.

 

Revenue and Cost of Sales

 

For the three months ended March 31, 2017, we had revenue of $672,129 compared to $1,467,750 for the three months ended March 31, 2016. Cost of sales for the three months ended March 31, 2017, was $582,456 compared to $1,068,427 for the three months ended March 31, 2016. Revenue and cost of sales decreased primarily due to PWT’s focus on marketing during the three months of operations.

 

Our gross profit was $89,673 and $399,323 for the three months ended March 31, 2017 and 2016, respectively.

 

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Selling and Marketing Expenses

 

For the three months ended March 31, 2017, we had selling and marketing expenses of $512,801, compared to $493,510 for the three months ended March 31, 2016. The increase in selling and marketing expenses was due to an increase in non-cash investor relations expenses.

 

General and Administrative Expenses

 

General and administrative expenses decreased to $624,530 for the three months ended March 31, 2017, compared to $686,846 for the three months ended March 31, 2016. General and administrative expenses decreased primarily due to a decrease in professional fees.

 

Research and Development Cost

 

Research and development cost for the three months ended March 31, 2017 and 2016, were $53,653 and $210,150, respectively.  The decrease in research and development costs was primarily due to the decrease in consultants and contractors expense and outside services of $136,966, and an overall decrease in salaries, durable items and other expenses of $19,531.

  

Other Income and (Expenses)

 

Other income for the three months ended March 31, 2017 and 2016, was $882,358 and $2,344,423, respectively. The decrease in other income was primarily a result of a change in gain of non-cash accounts associated with the fair value of the derivatives in the amount of $1,533,074, with an offset of interest expense of $12,278, which includes non-cash amortization of debt discount of $10,719.

  

Net Income/(Loss)

 

Our net income/(loss) decreased to $(232,553) for the three months ended March 31, 2017, compared to a net income of $1,342,001, for the three months ended March 31, 2016. The majority of the decrease in net income was due primarily to a decrease in revenue, operating expenses, other income and (expenses), which consisted of a decrease in gain in non-cash accounts associated with derivatives, and a decrease in gross profit.  

 

Liquidity and Capital Resources

 

Liquidity is the ability of a company to generate funds to support its current and future operations, satisfy its obligations, and otherwise operate on an ongoing basis. Significant factors in the management of liquidity are funds generated by operations, levels of accounts receivable and accounts payable and capital expenditures.

 

The condensed consolidated financial statements have been prepared on a going concern basis of accounting, which contemplates continuity of operations, realization of assets and liabilities and commitments in the normal course of business.  The accompanying condensed consolidated financial statements do not reflect any adjustments that might result if the Company is unable to continue as a going concern. The Company has not generated significant revenue, and has negative cash flows from operations, which raise substantial doubt about the Company’s ability to continue as a going concern. The ability of the Company to continue as a going concern and appropriateness of using the going concern basis is dependent upon, among other things, additional cash infusion. We obtained funds from our shareholders during the three months ending March 31, 2017. 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, cause substantial dilution for our stockholders, in case of equity financing.

 

At March 31, 2017 and December 31, 2016, we had cash of $442,928 and $351,321, respectively and working capital deficit of $8,556,349 and $11,056,570, respectively.  The decrease in working capital deficit was due to a decrease in contracts receivable, prepaid expense, non-cash derivative liabilities, and convertible notes, with an increase in cash, inventory asset, cost in excess of billing, accounts payable, accrued expenses, billing in excess of cost, deferred income, and loan payable. 

 

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Net cash used in operating activities was $330,208 for the three months ended March 31, 2017, compared to $540,090 for the prior period ended March 31, 2016. The decrease in cash used in operating activities was due to the overall decrease in professional fees and research and development. 

 

Net cash flows used in investing activities was $32,918 for the three months ended March 31, 2017, as compared to $5,699 for the prior period ended March 31, 2016. The net increase in cash used in investing activities was due to an increase in equipment purchases in the current period.

 

Net cash flows provided by financing activities was $454,736 for the three months ended March 31, 2017, as compared to $100,000 for the prior period ended March 31, 2016. The increase in cash provided by financing activities was due to an increase in equity financing. To date we have principally financed our operations through the sale of our common stock and the issuance of debt.

  

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

 

Between April 12, 2017 and May 11, 2017, the Company sold, in a private placement, an aggregate of 1,562,862 shares of its common stock to accredited investors for an aggregate consideration of $273,500 (the “Offering”). The shares issued in this Offering are subject to price protection for a period of one year from the issuance of the shares providing that under certain circumstances, the Company will issue additional shares of common stock of the Company for no additional consideration to the subscribers thereunder. The subscribers agreed to a lock-up provision, under which subject to certain terms and conditions therein, the subscribers shall not sell any of their shares of common stock of the Company obtained in this Offering for a period of twelve months.

 

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

 

Additional Information

 

In connection with certain one-time make good agreements, on April 28, 2017, the Company issued an aggregate of 51,582 shares of its common stock to certain holders of its common stock.

 

Between April 28, 2017 and May 15, 2017, the Company issued to consultants for services, including investor relations services, an aggregate of 4,924,591 shares of the Company’s common stock in lieu of cash consideration. 

 

On May 12, 2017, the Company’s Board of Directors approved the issuance of an aggregate of 300,000 shares of the Company’s common stock to a consultant for services.

 

The securities above were offered and sold pursuant to an exemption from the registration requirements under Section 4(a)(2) of the Securities Act of 1933, as amended (the “Securities Act”) since, among other things, the transactions did not involve a public offering and the securities were acquired for investment purposes only and not with a view to or for sale in connection with any distribution thereof.

 

Off-Balance Sheet Arrangements

 

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

 

Item 3.  Quantitative and Qualitative Disclosures About Market Risk.

 

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

 

Item 4.  Controls and Procedures.

 

Evaluation of Disclosure Controls and Procedures

 

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Pursuant to Rules 13a-15(b) and 15-d-15(b) under the Securities Exchange Act of 1934, as amended ("Exchange Act"), the Company carried out an evaluation, with the participation of the Company's management, including the Company's Chief Executive Officer and Chief Financial Officer ("CEO/CFO") of the effectiveness of the Company's disclosure controls and procedures as of the end of the period covered by this report. The term "disclosure controls and procedures", as defined under Rules 13a-15(e) and 15d-15(e) under the Exchange Act, means controls and other procedures of a company that are designed to ensure that information required to be disclosed by a company in the reports that it files or submits under the Exchange Act is recorded, processed, summarized and reported, within the time periods specified in the SEC's rules and forms. Disclosure controls and procedures include, without limitation, controls and procedures designed to ensure that information required to be disclosed by a company in the reports that it files or submits under the Exchange Act is accumulated and communicated to the company's management, including its principal executive and principal financial officer, as appropriate to allow timely decisions regarding required disclosure.

 

As disclosed in our annual report filing for the year ended December 31, 2016, there was a significant deficiency in the Company's internal control over financial reporting due to a lack of segregation of duties partly due to small Company staff size. Based upon the evaluation of the disclosure controls and procedures at the end of the period covered by this report, the Company's CEO/CFO concluded that the Company's disclosure controls and procedures were ineffective due to the significant deficiency in the Company's internal control over financial reporting.

 

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

 

Changes in Internal Control Over Financial Reporting

 

There were no changes in the Company’s internal control over financial reporting (as defined in Rule 13a-15f of the Exchange Act) that occurred during the first three months of 2017 that has materially affected, or are reasonably likely to materially affect, the Company’s internal control over financial reporting.

 

Limitations on Internal Controls

 

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

 

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PART II

 

Item 1.  Legal Proceedings.

 

None

 

Item 1A. Risk Factors.  

 

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

 

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

 

None

 

Item 3.  Defaults Upon Senior Securities.

 

None

 

Item 4.  Mine Safety Disclosures

 

Not applicable.

 

Item 5.  Other Information.

 

None

  

Item 6.  Exhibits.

 

Exhibit
Number
  Description of Exhibit
 
31   Certification by Chief Executive Officer and Chief Financial Officer, required by Rule 13a-14(a) or Rule 15d-14(a) of the Exchange Act.
32   Certification by Chief Executive Officer and Chief Financial Officer, required by Rule 13a-14(b) or Rule 15d-14(b) of the Exchange Act and Section 1350 of Chapter 63 of Title 18 of the United States Code.
101.INS   XBRL Instance Document.*
101.SCH   XBRL Taxonomy Extension Schema.*
101.CAL   XBRL Taxonomy Extension Calculation Linkbase.*
101.DEF   XBRL Taxonomy Extension Definition Linkbase.*
101.LAB   XBRL Taxonomy Extension Label Linkbase.*
101.PRE   XBRL Extension Presentation Linkbase.*

 

* Attached as Exhibit 101 to this report are the following financial statements from the Company’s Quarterly Report on Form 10-Q for the quarter ended March 31, 2017 formatted in XBRL (eXtensible Business Reporting Language): (i) the Balance Sheets, (ii) the Statement of Operations, (iii) the Statement of Shareholders’ Equity, (iv) the Statement of Cash Flow, and (v) Notes to Financial Statements.

 

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SIGNATURES

 

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

 

  ORIGINCLEAR, INC.
     
  By: /s/ T Riggs Eckelberry
    T Riggs Eckelberry
   

Chief Executive Officer

(Principal Executive Officer) and

    Acting Chief Financial Officer
(Principal Accounting and Financial Officer)
    May 15, 2017

 

 

 

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