ORIGINCLEAR, INC. AND SUBSIDIARIES
The accompanying notes are an integral part of these unaudited
condensed consolidated financial statements
ORIGINCLEAR, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS-UNAUDITED
JUNE 30, 2020
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1.
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The accompanying unaudited
condensed consolidated financial statements of OriginClear, Inc. (the “Company”) have been prepared in accordance
with accounting principles generally accepted in the United States of America for interim financial information and with the instructions
to Form 10-Q and Rule 10-01 of Regulation S-X. Accordingly, they do not include all of the information and footnotes
required by generally accepted accounting principles for complete financial statements. In the opinion of management, all normal
recurring adjustments considered necessary for a fair presentation have been included. Operating results for the six
months ended June 30, 2020 are not necessarily indicative of the results that may be expected for the year ending December 31,
2020. For further information refer to the financial statements and footnotes thereto included in the Company’s
Form 10-K for the year ended December 31, 2019.
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Going Concern
The accompanying financial statements
have been prepared on a going concern basis of accounting, which contemplates continuity of operations, realization of assets and
liabilities and commitments in the normal course of business. The accompanying financial statements do not reflect any
adjustments that might result if the Company is unable to continue as a going concern. These factors, among others raise substantial
doubt about the Company’s ability to continue as a going concern. Our independent auditors, in their report on
our audited financial statements for the year ended December 31, 2019 expressed substantial doubt about our ability to continue
as a going concern.
The ability of the Company to continue
as a going concern and appropriateness of using the going concern basis is dependent upon, among other things, achieving profitable
operations and/or raising additional capital. During the six months ended June 30, 2020, the Company obtained funds from
the sales of preferred stock. Management believes this funding will continue from current investors and from new investors. The
Company also generated revenue of $2,147,438 during the six months ended June 30, 2020, and has standing purchase orders and open
invoices with customers which will provide funds for operations. Management believes the existing shareholders, and prospective
new investors and future sales will provide the additional cash needed to meet the Company’s obligations as they become
due and will allow the development of its core business operations. No assurance can be given that any future financing will be
available or, if available, that it will be on terms that are satisfactory to the Company. Even if the Company is able to obtain
additional financing, it may contain restrictions on our operations, in the case of debt financing or cause substantial dilution
for our stockholders, in case of equity financing.
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2.
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SUMMARY OF SIGNIFICANT ACCOUNTING
POLICES
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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. As of June 30, 2020, the Company had
a restricted cash balance of $88,532 consisting of Preferred Series M investments in an escrow account.
Use of Estimates
The preparation of financial
statements in conformity with accounting principles generally accepted in the United States of America requires management to make
estimates and assumptions that affect the reported amounts of assets and liabilities, disclosure of contingent assets and liabilities
at the date of the financial statements, and the reported amounts of revenues and expenses during the reporting period. Actual
results could differ from those estimates. Significant estimates include estimates used to review the Company’s impairments
and estimations of long-lived assets, revenue recognition on percentage of completion type contracts, allowances for uncollectible
accounts, warranty reserves, inventory valuation, derivative liabilities and other conversion features, fair value investments,
valuations of non-cash capital stock issuances and the valuation allowance on deferred tax assets. The Company bases its estimates
on historical experience and on various other assumptions that are believed to be reasonable in the circumstances, the results
of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent
from other sources. Actual results may differ from these estimates under different assumptions or conditions.
Net Earnings (Loss) per Share Calculations
Basic loss per share calculations
are computed by dividing income (loss) available to common shareholders by the weighted-average number of common shares available.
Diluted earnings per share is computed similar to basic earnings per share except that the denominator is increased to include
securities or other contracts to issue common stock that would have been outstanding if the potential common shares had been issued
and if the additional common shares were dilutive.
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For the Six Months Ended
June 30,
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2020
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2019
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Income (Loss) to common shareholders (Numerator)
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$
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15,324,964
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$
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(7,210,312
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)
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Basic weighted average number of common shares outstanding (Denominator)
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8,037,205
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652,652
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Diluted weighted average number of common shares outstanding (Denominator)
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106,884,726
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652,652
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Six months ended
June 30, 2020
The Company has excluded 122,044
shares of common stock issuable upon conversion of warrants, shares of common stock issuable from convertible debt of $569,723
and shares issuable from convertible preferred stock for the six months ended June 30, 2020, because their impact on the loss per
share is anti-dilutive.
The Company has included 98,847,521
shares of common stock issuable from convertible debt of $3,333,494, and preferred stock for the six months ended June 30, 2020,
because their impact on the loss per share is dilutive.
Six Months Ended June 30,
2019
The Company has excluded 122,044
shares of common stock issuable upon conversion of warrants, shares of common stock issuable pursuant to outstanding convertible
debt of $3,706,710 and shares issuable from convertible preferred stock for the six months ended June 30, 2020, 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 as of June 30, 2020 and December 31,
2019, respectively. The net contract receivable balance was $210,191 and $522,911 at June 30, 2020 and December 31, 2019, respectively.
Indefinite Lived Intangibles
and Goodwill Assets
The Company accounts for business
combinations under the acquisition method of accounting in accordance with ASC 805, “Business Combinations,” where
the total purchase price is allocated to the tangible and identified intangible assets acquired and liabilities assumed based on
their estimated fair values. The purchase price is allocated using the information currently available, and may be adjusted, up
to one year from acquisition date, after obtaining more information regarding, among other things, asset valuations, liabilities
assumed and revisions to preliminary estimates. The purchase price in excess of the fair value of the tangible and identified intangible
assets acquired less liabilities assumed is recognized as goodwill.
The Company tests for indefinite
lived intangibles and goodwill impairment in the fourth quarter of each year and whenever events or circumstances indicate that
the carrying amount of the asset exceeds its fair value and may not be recoverable. In accordance with its policies, the Company
performed a qualitative assessment of indefinite lived intangibles and goodwill at June 30, 2020, and determined there was no impairment
of indefinite lived intangibles and goodwill.
Research and Development
Research and development costs
are expensed as incurred. Total research and development costs were $54,067 and $50,760 for the six months ended June 30, 2020
and 2019, respectively.
Property and Equipment
Property and equipment are stated
at cost. Gain or loss is recognized upon disposal of property and equipment, and the asset and related accumulated depreciation
are removed from the accounts. Expenditures for maintenance and repairs are charged to expense as incurred, while expenditures
for addition and betterment are capitalized. Furniture and equipment are depreciated on the straight-line method and include the
following categories:
Estimated Life
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Machinery and equipment
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5-10 years
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Furniture, fixtures and computer equipment
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5-7 years
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Vehicles
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3-5 years
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Leasehold improvements
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2-5 years
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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.
During the six months ended
June 30, 2020, the Company purchased equipment for $190,000, which included an accounts payable for $90,000 to be paid at $1,500
per month for 60 months and a subscription payable for $100,000 in common stock to be issued in one-third (1/3) equal tranches
over the next three years. As of June 30, 2020, the Company made one monthly payment of $1,500.
Depreciation expense during
the six months ended June 30, 2020 and 2019, respectively was $25,462 and $21,833.
Stock-Based Compensation
The Company periodically issues
stock options and warrants to employees and non-employees in non-capital raising transactions for services and for financing costs.
The Company accounts for stock option and warrant grants issued and vesting to employees based on the authoritative guidance provided
by the Financial Accounting Standards Board whereas the value of the award is measured on the date of grant and recognized over
the vesting period. The Company accounts for stock option and warrant grants issued and vesting to non-employees in accordance
with the authoritative guidance of the Financial Accounting Standards Board whereas the value of the stock compensation is based
upon the measurement date as determined at either a) the date at which a performance commitment is reached, or b) at the date at
which the necessary performance to earn the equity instruments is complete. Non-employee stock-based compensation charges generally
are amortized over the vesting period on a straight-line basis. In certain circumstances where there are no future performance
requirements by the non-employee, option grants are immediately vested and the total stock-based compensation charge is recorded
in the period of the measurement date.
Accounting for Derivatives
The Company evaluates all of
its financial instruments to determine if such instruments are derivatives or contain features that qualify as embedded derivatives.
For derivative financial instruments that are accounted for as liabilities, the derivative instrument is initially recorded at
its fair value and is then re-valued at each reporting date, with changes in the fair value reported in the statements of operations.
For stock-based derivative financial instruments, the Company uses a probability weighted average series Binomial lattice option
pricing models to value the derivative instruments at inception and on subsequent valuation dates.
The classification of derivative
instruments, including whether such instruments should be recorded as liabilities or as equity, is evaluated at the end of each
reporting period. Derivative instrument liabilities are classified in the balance sheet as current or non-current based on whether
or not net-cash settlement of the derivative instrument could be required within 12 months of the balance sheet date.
Fair Value of Financial Instruments
Fair Value of Financial Instruments,
requires disclosure of the fair value information, whether or not recognized in the balance sheet, where it is practicable to estimate
that value. As of June 30, 2020, the balances reported for cash, contract receivables, cost in excess of billing, prepaid expenses,
accounts payable, billing in excess of cost, and accrued expenses approximate the fair value because of their short maturities.
We adopted ASC Topic 820 for
financial instruments measured as fair value on a recurring basis. ASC Topic 820 defines fair value, established a framework for
measuring fair value in accordance with accounting principles generally accepted in the United States and expands disclosures about
fair value measurements.
Fair value is defined as the
price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants
at the measurement date. ASC Topic 820 established a three-tier fair value hierarchy which prioritizes the inputs used in measuring
fair value. The hierarchy gives the highest priority to unadjusted quoted prices in active markets for identical assets or liabilities
(level 1 measurements) and the lowest priority to unobservable inputs (level 3 measurements). These tiers include:
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Level 1, defined as observable inputs such as quoted prices for identical instruments in active markets;
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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
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●
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Level 3, defined as unobservable inputs in which little or no market data exists, therefore requiring an entity to develop its own assumptions, such as valuations derived from valuation techniques in which one or more significant inputs or significant value drivers are unobservable.
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The following table presents
certain investments and liabilities of the Company’s financial assets measured and recorded at fair value on the Company’s balance
sheets on a recurring basis and their level within the fair value hierarchy as of June 30, 2020.
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Total
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(Level 1)
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(Level 2)
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(Level 3)
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Investment at fair value-securities
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$
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6,400
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$
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6,400
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$
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-
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$
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-
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Total Assets measured at fair value
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$
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6,400
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$
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6,400
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$
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-
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$
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-
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Total
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(Level 1)
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(Level 2)
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(Level 3)
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Derivative Liability
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$
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14,421,908
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$
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-
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$
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-
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$
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14,421,908
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Total liabilities measured at fair value
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$
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14,401,908
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$
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-
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$
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-
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$
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14,421,908
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The following is a reconciliation
of the derivative liability for which level 3 inputs were used in determining the approximate fair value:
Balance as of January 1, 2020
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$
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31,640,470
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Gain on conversion of debt and change in derivative liability
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(17,218,562
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)
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Balance as of June 30, 2020
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$
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14,421,908
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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:
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6/30/2020
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Risk free interest rate
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0.13% - 0.18%
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Stock volatility factor
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107.0% - 239.0%
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Weighted average expected option life
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6 months - 5 years
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Expected dividend yield
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None
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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
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.
Preferred Stock
Series C
The Company has designated 1,000
shares of its preferred stock as Series C Preferred Stock. Such 1,000 shares are outstanding and are held by T. Riggs Eckelberry,
our chief executive officer. Shares of Series C Preferred Stock are not convertible to common stock, are not entitled to receive
dividends, and do not have a liquidation preference. The Series C Preferred Stock have no pre-emptive or subscription rights, and
there is no sinking fund provision applicable to the Series C Preferred Stock. The Series C Preferred Stock entitles the holder
to 51% of the total voting power of our stockholders. Share of Series C Preferred Stock will automatically be redeemed by the Company
at par value on the first to occur of the following events: (i) the date that Mr. Eckelberry ceases to serve as officer, director
or consultant of the Company, or (ii) on the date that the Company’s shares of common stock first trade on any national securities
exchange provided that (a) the listing rules of any such exchange prohibit preferential voting rights of a class of securities
of the Company, or (b) listing on any such national securities exchange is conditioned upon the elimination of the preferential
voting rights of the Series C Preferred Stock. As of June 30, 2020, there are 1,000 shares of Series C Preferred Stock issued and
outstanding.
Series D-1
The
Company has designated 50,000,000 shares of its preferred stock as Series D-1 Preferred Stock. Each share of Series D-1 Preferred
Stock is convertible into 0.0005 shares of common stock. The Series D-1 Preferred Stock may not be converted to common stock to
the extent such conversion would result in the holder beneficially owning more than 4.99% of our outstanding common stock. The
holders of outstanding shares of Series D-1 Preferred Stock are not entitled to receive dividends, and do not have a liquidation
preference. The Series D-1 Preferred Stock have no preemptive or subscription rights, and there is no redemption or sinking fund
provisions applicable to the Series D-1 Preferred Stock. During the six months ended June 30, 2020, the Company issued 295,141
shares of common stock for services upon conversion of 6,000,0000 shares of preferred stock with a value of $23,788 using the closing
stock price on grant date. As of June 30, 2020, there were 32,500,000 shares of Series D-1 Preferred Stock issued and outstanding.
The Company did not recognize any gain or loss on conversion, as the shares were converted within the terms of the agreement.
Series E
The
Company has designated 4,000,000 shares of its preferred stock as Series E Preferred Stock. Each share of Series E Preferred Stock
is convertible into the greater of (A) 0.05 shares of common stock and (B) the number of shares the holder would have received
pursuant to the holder’s subscription agreement if the preferred shares were priced based on the average closing sale price
of three trading days prior to the date the holder requests a conversion, provided the lowest price for which an adjustment will
be made is 50% of the purchase price paid by any purchaser of the Series E Preferred Stock. The Series E Preferred Stock may not
be converted to common stock to the extent such conversion would result in the holder beneficially owning more than 4.99% of our
outstanding common stock. The holders of outstanding shares of Series E Preferred Stock are not entitled to receive dividends,
and do not have a liquidation preference. The Series E Preferred Stock have no pre-emptive or subscription rights, and there is
no redemption or sinking fund provisions applicable to the Series E Preferred Stock. The Series E Preferred Stock does not have
voting rights, except as required by law and with respect to certain protective provisions set forth in the Certificate of Designation
of Series E Preferred Stock. As of December 31, 2019, there were 2,139,649 shares of Series E Preferred Stock issued and outstanding.
During the six months ended June 30, 2020, the Company issued 30,124 shares of common stock upon conversion of 602,616 Series E
Preferred Stock. As of June 30, 2020, there were 1,537,213 shares of Series E Preferred Stock issued and outstanding. The Company
did not recognize any gain or loss on conversion, as the shares were converted within the terms of the agreement.
Series F
The
Company has designated 6,000 shares of its preferred stock as Series F Preferred Stock. The Series F Preferred Stock has a stated
value of $1,000 per share. The Series F Preferred Stock is not convertible into common stock. The holders of outstanding shares
of Series F Preferred Stock are entitled to quarterly dividends at the annual rate of 8% of the stated value, in preference to
any dividends on the common stock. The Series F Preferred Stock has a liquidation preference equal to the stated value plus any
accrued but unpaid dividends, in preference to any other series of capital stock of the Company. The Series F Preferred Stock has
no pre-emptive or subscription rights, and there is no sinking fund provision applicable to the Series F Preferred Stock. The Series
F Preferred Stock does not have voting rights, except as required by law. The Company will be required to redeem all outstanding
shares of Series F Preferred Stock on September 1, 2020, at a price equal to the stated value plus any accrued but unpaid dividends.
The Company may, in its sole discretion, at any time while the Series F Preferred Stock is outstanding, redeem all or any portion
of the outstanding Series F Preferred Stock at a price equal to the stated value plus any accrued but unpaid dividends. There are
thus no restrictions on the Company redeeming shares of Series F Preferred Stock, subject to the Company’s payment of any
accrued but unpaid dividends upon such redemption. As of June 30, 2020, there were 1,678 shares of Series F Preferred Stock issued
and outstanding and the Company accrued dividends in the amount of $33,560.
Series
G
The Company has designated 6,000
shares of its preferred stock as Series G Preferred Stock. The Series G Preferred Stock has a stated value of $1,000 per share.
The Series G Preferred Stock is not convertible into common stock. The holders of outstanding shares of Series G Preferred Stock
are entitled to quarterly dividends at the annual rate of 8% of the stated value, in preference to any dividends on the common
stock. The Series G Preferred Stock has a liquidation preference equal to the stated value plus any accrued but unpaid dividends,
in preference to any other series of capital stock of the Company (other than the Series F Preferred Stock). The Series G Preferred
Stock has no pre-emptive or subscription rights, and there is no sinking fund provision applicable to the Series G Preferred Stock.
The Series G Preferred Stock does not have voting rights, except as required by law. The Company will be required to redeem all
outstanding shares of Series G Preferred Stock on April 30, 2021, at a price equal to the stated value plus any accrued but unpaid
dividends. The Company may, in its sole discretion, at any time while the Series G Preferred Stock is outstanding, redeem all or
any portion of the outstanding Series G Preferred Stock at a price equal to the stated value plus any accrued but unpaid dividends.
There are thus no restrictions on the Company redeeming shares of Series G Preferred Stock, subject to the Company’s payment
of any accrued but unpaid dividends upon such redemption. On February 21, 2020, 100 shares of Series G Preferred Stock were exchanged
for Series K Preferred Stock. As of June 30, 2020, there were 430 shares of Series G Preferred Stock issued and outstanding and
the Company accrued dividends in the amount of $8,600.
Series I
The Company has designated
4,000 shares of its preferred stock as Series I Preferred Stock. The Series I Preferred Stock has a stated value of $1,000 per
share. The Series I Preferred Stock is not convertible into common stock. The holders of outstanding shares of Series I Preferred
Stock are entitled to quarterly dividends at the annual rate of 8% of the stated value, in preference to any dividends on the
common stock. The Series I Preferred Stock has a liquidation preference equal to the stated value plus any accrued but unpaid
dividends, in preference to the common stock. The Series I Preferred Stock has no preemptive or subscription rights, and there
is no sinking fund provision applicable to the Series I Preferred Stock. The Series I Preferred Stock does not have voting rights,
except as required by law. The Company will be required to redeem all outstanding shares of Series I Preferred Stock two years
following the date that is the later of the (i) final closing of the tranche (as designated in the subscription agreement under
which such shares were sold) that such shares to be redeemed were part of (a “Series I Tranche”), or (ii) the expiration
date of the Series I Tranche that such shares to be redeemed were part of, at a price equal to the stated value plus any accrued
but unpaid dividends. The Company may, in its sole discretion, at any time while the Series I Preferred Stock is outstanding,
redeem all or any portion of the outstanding Series I Preferred Stock at a price equal to the stated value plus any accrued but
unpaid dividends. There are thus no restrictions on the Company redeeming shares of Series I Preferred Stock, subject to the Company’s
payment of any accrued but unpaid dividends upon such redemption. The issuance of the shares were accounted for under ASC 480-10-25-4,
which requires liability treatment for certain mandatorily redeemable financial instruments, and the cumulative dividends are
recorded as interest expense. As of June 30, 2020, there were 797 shares of Series I Preferred Stock issued and outstanding and
the Company accrued dividends in the amount of $15,948.
Series J
The Company has designated 100,000
shares of its preferred stock as Series J Preferred Stock. The Series J Preferred Stock has a stated value of $1,000 per share.
The Series J Preferred Stock is convertible into common stock in an amount determined by dividing the stated value by the conversion
price, which is equal to lower of (a) the closing price of the common stock on the date the Company has banked funds and received
and accepted executed subscription documents and the purchase price or (b) the average closing sale price of the common stock for
the five trading days prior to the conversion date; certain prior investors are also entitled to certain make-good shares. The
Series J Preferred Stock may not be converted to common stock to the extent such conversion would cause the holder to beneficially
own more than 4.99% of the Company’s outstanding common stock. Holders of the Series J Preferred Stock are entitled to dividends
on an as-converted basis with the common stock. The Series J Preferred Stock will entitle the holders to a payment on an as-converted
and pari passu basis with the common stock upon any liquidation. The Series J Preferred Stock has no pre-emptive or subscription
rights, and there are no sinking fund or redemption provisions applicable to the Series J Preferred Stock. The Series J Preferred
Stock votes on an as-converted basis with the common stock, subject to the beneficial ownership limitation. During the six months
ended June 30, 2020, the Company issued 41,541 shares of common stock upon the conversion of three (3) shares of preferred stock.
The Company did not recognize a gain or loss since the shares were converted within the terms of the agreement. As of June 30,
2020, there were 346 shares of Series J Preferred Stock issued and outstanding.
Series K
The Company has designated 4,000
shares of its preferred stock as Series K Preferred Stock. The Series K Preferred Stock has a stated value of $1,000 per share.
The Series K Preferred Stock is not convertible into common stock. The holders of outstanding shares of Series K Preferred Stock
are entitled to quarterly dividends at the annual rate of 8% of the stated value, in preference to any dividends on the common
stock. The Series K Preferred Stock has a liquidation preference equal to the stated value plus any accrued but unpaid dividends,
in preference to the common stock. The Series K Preferred Stock has no preemptive or subscription rights, and there is no sinking
fund provision applicable to the Series K Preferred Stock. The Series K Preferred Stock does not have voting rights, except as
required by law. The Company will be required to redeem all outstanding shares of Series K Preferred Stock two years following
the date that is the later of the (i) final closing of the tranche (as designated in the subscription agreement under which such
shares were sold) that such shares to be redeemed were part of (a “Series K Tranche”), or (ii) the expiration date
of the Series K Tranche that such shares to be redeemed were part of, at a price equal to the stated value plus any accrued but
unpaid dividends. The Company may, in its sole discretion, at any time while the Series K Preferred Stock is outstanding, redeem
all or any portion of the outstanding Series K Preferred Stock at a price equal to the stated value plus any accrued but unpaid
dividends. There are thus no restrictions on the Company redeeming shares of Series K Preferred Stock, subject to the Company’s
payment of any accrued but unpaid dividends upon such redemption. The issuance of the shares were accounted for under ASC 480-10-25-4,
which requires liability treatment for certain mandatorily redeemable financial instruments, and the cumulative dividends are recorded
as interest expense. On February 21, 2020, an investor was issued 100 shares of Series K Preferred Stock in exchange for 100 shares
of Series G Preferred Stock. During the six months ended June 30, 2020, the Company issued an aggregate of 1,160 shares of Series
K Preferred Stock for an aggregate purchase price of $1,159,767. As of June 30, 2020, there were 3,160 shares of Series K Preferred
Stock issued and outstanding. The Company accrued dividends in the amount of $62,223.
Series L
The Company has designated 100,000
shares of its preferred stock as Series L Preferred Stock. The Series L Preferred Stock has a stated value of $1,000 per share.
The Series L Preferred Stock is convertible into common stock in an amount determined by dividing the stated value by the conversion
price, which is equal to lower of(a) the closing price of the common stock on the date the Company has banked funds and received
and accepted executed subscription documents and the purchase price or (b) the average closing sale price of the common stock for
the five trading days prior to the conversion date; certain prior investors are also entitled to certain make-good shares. The
Series L Preferred Stock may not be converted to common stock to the extent such conversion would cause the holder to beneficially
own more than 4.99% of the Company’s outstanding common stock. Holders of the Series L Preferred Stock are entitled to dividends
on an as-converted basis with the common stock. The Series L Preferred Stock will entitle the holders to a payment on an as-converted
and pari passu basis with the common stock upon any liquidation. The Series L Preferred Stock has no pre-emptive or subscription
rights, and there is no sinking fund or redemption provisions applicable to the Series L Preferred Stock. The Series L Preferred
Stock votes on an as-converted basis with the common stock, subject to the beneficial ownership limitation. The Company issued
an aggregate of 580 shares of Series L Preferred Stock with the Series K Preferred Stock. During the six months ended June 30,
2020, the Company issued an aggregate of 1,001,976 shares of common stock upon conversion of 50 shares of Series L Preferred Stock.
As of June 30, 2020, there were an aggregate of 1,530 shares of Series L Preferred Stock issued and outstanding. The Company recognized
a loss on the conversions of the Series Preferred Stock in the amount of $6,063.
Series M
Pursuant to the Amended and
Restated Certificate of Designation of Series M Preferred Stock filed with the Secretary of State of Nevada on July 1, 2020, the
Company has designated 800,000 shares of its preferred stock as Series M Preferred Stock. Each share of Series M Preferred Stock
has a stated value of $25. The Series M Preferred Stock is not convertible into common stock. The holders of outstanding shares
of Series M Preferred Stock are entitled to receive dividends, at the annual rate of 10%, payable monthly, payable in preference
and priority to any payment of any dividend on the common stock. The Series M Preferred Stock will be entitled to a liquidation
preference in an amount equal to $25 per share plus any declared but unpaid dividends, before any payments to holders of common
stock. The Series M Preferred Stock have no pre-emptive or subscription rights, and there are no sinking fund provisions applicable
to the Series M Preferred Stock. The Series M Preferred Stock does not have voting rights, except as required by law and with respect
to certain protective provisions set forth in the Certificate of Designation of Series M Preferred Stock. To the extent it may
lawfully do so, the Company may, in its sole discretion, at any time when there are outstanding shares of Series M Preferred Stock,
redeem any or all of the then outstanding shares of Series M Preferred Stock at a redemption price of $37.50 per share (150% of
the stated value) plus any accrued but unpaid dividends. During the six months ended June 30, 2020, the Company reclassified noncash
accrued interest of $46,260 associated with the exchange of a note, from preferred additional paid in capital, which affected the
balance sheet only. During the six months ended June 30, 2020, the Company issued an aggregate of 4,959 shares of Series M Preferred
Stock for an aggregate price of $155,250. The Company received additional funds in the amount of $89,450 less $918 in escrow fees,
leaving a net balance of $88,532 in an escrow account. During the period ended June 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. The Company
did not recognize a gain or loss since the shares were converted within the terms of the agreement. As of June 30, 2020 there were
38,839 shares of Series M Preferred Stock issued and outstanding, a subscription payable in the amount of $25,750 for 1,030 shares
purchased but not yet issued, and accrued dividends in the amount of $44,141.
Series O
The Company has designated 2,000
shares of preferred stock as Series O Preferred Stock. The Series O Preferred Stock has a stated value of $1,000 per share, and
is 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 Preferred
Stock has a liquidation preference equal to the stated value plus any accrued but unpaid dividends, in preference to the common
stock. The Series O Preferred Stock has no preemptive or subscription rights, and there is no sinking fund provision applicable
to the Series O Preferred Stock. The Series O Preferred Stock does not have voting rights except as required by law. The Series
O Preferred Stock is convertible into common stock of the Company in an amount determined by dividing 200% of the stated value
of the Series O Preferred Stock being converted by the conversion price, provided that, the Series O may not be converted into
common stock to the extent such conversion would result in the holder beneficially owning more than 4.99% of the Company’s
outstanding common stock. 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 Preferred
Stock at any time while the Series O Preferred Stock are outstanding at a redemption price equal to the stated value plus any
accrued but unpaid dividends. The issuance of the shares were accounted for under ASC 480-10-25-4, which requires liability treatment
for certain mandatorily redeemable financial instruments, and the cumulative dividends are recorded as interest expense. During
the six months ended June 30, 2020, the Company issued an aggregate of 105 shares of Series O Preferred Stock for an aggregate
purchase price of $105,000. As of June 30, 2020, there were 105 shares of Series O Preferred Stock issued and outstanding. The
Company accrued dividends in the amount of $413.
Series P
The Company has designated 500
shares of preferred stock as Series P Preferred Stock. The Series P Preferred Stock has a stated value of $1,000 per share, and
will be entitled to receive dividends on an as-converted basis with the Company’s common stock. The Series P Preferred Stock
is convertible into shares of the Company’s common stock, on the terms and conditions set forth in the Certificate of Designation
of Series P Preferred Stock, which includes certain make-good shares for certain prior investors, and provided that, the Series
P Preferred Stock may not be converted into common stock to the extent such conversion would result in the holder beneficially
owning more than 4.99% of the Company’s outstanding common stock. The Series P Preferred Stock will entitle the holders to
a payment on an as-converted and pari passu basis with the common stock upon any liquidation. The Series P Preferred Stock has
no preemptive or subscription rights, and there is no sinking fund or redemption provisions applicable to the Series P Preferred
Stock. The Series P Preferred Stock votes on an as-converted basis with the common stock, subject to the beneficial ownership limitation.
The Company issued an aggregate of 26 shares of Series O Preferred Stock with the Series L Preferred Stock. As of June 30, 2020,
there were an aggregate of 26 shares of Series P Preferred Stock issued and outstanding.
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.
June 30, 2020
The Company issued 3,961,928
shares of common stock for the settlement of convertible promissory notes in an aggregate principal in the amount of $82,812, plus
interest in the amount of $19,078, and default settlement fees of $20,993, based upon conversion prices of $0.025 to $0.045.
The
Company issued 1,210,681 shares of common stock for services at fair value of $127,008.
The
Company issued 295,141 shares of common stock upon conversion of 6,000,000 shares of Series D-1 preferred stock for services with
a fair value of $23,778. The Company did not recognize a gain or loss since the shares were converted within the terms of the agreement.
The
Company issued 30,124 shares of common stock upon conversion of 602,616 shares of Series E preferred stock. The Company did not
recognize a gain or loss since the shares were converted within the terms of the agreement.
The
Company issued 1,001,976 shares of common stock upon conversion of 50 shares of Series L preferred stock. The Company recognized
a loss on the conversions of the shares in the amount of $6,063.
The
Company issued 41,541 shares of common stock upon conversion of 3 shares of Series J preferred stock. The Company did not recognize
a gain or loss since the shares were converted within the terms of the agreement.
The
Company issued 137,052 shares of common stock upon conversion of 320 shares of Series M preferred stock. The Company did not recognize
a gain or loss since the shares were converted within the terms of the agreement.
June 30, 2019
The
Company issued 642,614 shares of common stock for the settlement of convertible promissory notes in an aggregate principal in the
amount of $384,588, plus interest in the amount of $79,082, plus a default settlement of $60,775, with an aggregate fair value
loss on conversion of debt in the amount of $747,556, based upon conversion prices of $1 to $4.
The
Company issued 213,003 shares of common stock for services at fair value of $383,333.
The
Company issued 82,799 shares of common stock through a private placement for purchase of Series G preferred stock.
|
4.
|
RESTRICTED STOCKS AND WARRANTS
|
Restricted Stock to CEO
Between May 12, 2016, and August
14, 2019, the Company entered into Restricted Stock Grant Agreements (“the RSGAs”) with its Chief Executive Officer,
Riggs Eckelberry, to create management incentives to improve the economic performance of the Company and to increase its value
and stock price. All shares issuable under the RSGAs are performance-based shares and none have yet vested nor have any been issued.
The RSGAs provides for the issuance of up to an aggregate of 109,214 shares of the Company’s common stock to Mr. Eckelberry
provided certain milestones are met in certain stages; a) If the Company’s consolidated gross revenue, calculated in accordance
with generally accepted accounting principles, consistently applied, equals or exceeds $15,000,000 for the trailing twelve month
period as reported in the Company’s quarterly or annual financial statements, the Company will issue up to an aggregate of
54,607 shares of its common stock; b) If the Company’s consolidated operating profit (Operating Profit = Operating Revenue
- Cost of Goods Sold - Operating Expenses - Depreciation & Amortization), calculated in accordance with generally accepted
accounting principles, equals or exceeds $1,500,000 for the trailing twelve month period as reported as reported in the Company’s
SEC Reports, the Company will issue up to an aggregate of 54,607 shares of its common stock. The Company has not recognized any
costs associated with the milestones because none were achieved. 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. During the period ended June 30, 2020,
the Company did not recognize any costs associated with the milestones because none were achieved. 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 June 30, 2020, there was no alternative vesting selected and no shares were issued.
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. During the period ended June 30, 2020, the
Company did not recognize any costs associated with the milestones because none were achieved.
Warrants
During
the six months ended June 30, 2020, no warrants were issued by the Company. A summary of the Company’s warrant activity and
related information follows for the six months ended June 30, 2020:
|
|
June 30, 2020
|
|
|
|
|
|
|
Weighted
|
|
|
|
Number
|
|
|
average
|
|
|
|
of
|
|
|
exercise
|
|
|
|
Warrants
|
|
|
price
|
|
Outstanding - beginning of period
|
|
|
122,044
|
|
|
$
|
500
|
|
Granted
|
|
|
-
|
|
|
$
|
-
|
|
Exercised
|
|
|
-
|
|
|
$
|
-
|
|
Forfeited
|
|
|
-
|
|
|
$
|
-
|
|
Outstanding - end of period
|
|
|
122,044
|
|
|
$
|
500
|
|
At June 30, 2020, the weighted average remaining
contractual life of warrants outstanding:
|
|
|
June 30, 2020
|
|
|
|
|
|
|
|
|
|
|
Weighted Average
|
|
Exercisable
|
|
|
Warrants
|
|
|
Warrants
|
|
|
Remaining Contractual
|
|
Prices
|
|
|
Outstanding
|
|
|
Exercisable
|
|
|
Life (years)
|
|
$
|
500.00
|
|
|
|
122,044
|
|
|
|
122,044
|
|
|
|
1.12
|
|
|
|
|
|
|
122,044
|
|
|
|
122,044
|
|
|
|
|
|
At June 30, 2020, the aggregate
intrinsic value of the warrants outstanding was $0.
|
5.
|
CONVERTIBLE PROMISSORY NOTES
|
As of June 30, 2020, the outstanding
convertible promissory notes are summarized as follows:
Convertible Promissory Notes
|
|
$
|
3,333,494
|
|
Less current portion
|
|
|
1,021,613
|
|
Total long-term liabilities
|
|
$
|
2,311,881
|
|
Maturities of long-term debt
for the next four years are as follows:
Period Ending June 30,
|
|
Amount
|
|
2021
|
|
|
1,021,613
|
|
2022
|
|
|
2,081,050
|
|
2023
|
|
|
200,000
|
|
2024
|
|
|
30,831
|
|
|
|
$
|
3,333,494
|
|
At June 30, 2020, the Company
had $3,333,494 in convertible promissory notes.
On various dates from 2014 through
May 2015, the Company issued unsecured convertible promissory notes (the “2014-2015 Notes”), that matured on various
dates and were extended sixty (60) months from the effective date of each Note. The 2014-2015 Notes bear interest at 10% per year.
The 2014-2015 Notes may be converted into shares of the Company’s common stock at conversion prices ranging from the lesser
of $4,200 to $9,800 (subject to adjustment for stock splits, dividends, combinations and other similar transactions) or 50% of
the lowest trade price on any trade day following issuance of the 2014-2015 Notes. In addition, for as long as the 2014-2015
Notes or other convertible notes in effect between the purchaser and the Company are outstanding, if the Company issues any security
with terms more favorable than the terms of the 2014-2015 Notes or such other convertible notes or a term was not similarly provided
to the purchaser of the 2014-2015 Notes or such other convertible notes, then such more favorable or additional term shall, at
the purchaser’s option, become part of the 2014-2015 Notes and such other convertible notes. The conversion feature of the
2014-2015 Notes was considered a derivative in accordance with current accounting guidelines because of the reset conversion features
of the 2014-2015 Notes. During the six months ended June 30, 2020, the Company issued 1,786,652 shares of common stock, upon conversion
of $34,950 in principal, plus accrued interest of $19,078. As of June 30, 2020, the 2014-2015 Notes had an aggregate remaining
balance of $1,065,600.
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 six months ended June 30, 2020, the Company issued 130,711 shares of common stock upon conversion of
principal in the amount of $5,150. As of June 30, 2020, the remaining balance was $62,275.
The Company issued various, unsecured
convertible promissory notes (the “2015-2016 Notes”), on various dates ending on May 19, 2016. The 2015-2016 Notes
matured and were extended from the date of each tranche through maturity dates ending on May 19, 2020. The 2015-2016 Notes bear
interest at 10% per year. The 2015-2016 Notes may be converted into shares of the Company’s common stock at conversion prices
ranging from the lesser of $1,400 to $5,600 (subject to adjustment for stock splits, dividends, combinations and other similar
transactions) or 50% of the lowest trade price on any trade day following issuance of the 2015-2016 Notes. The conversion
feature of the 2015-2016 Notes was considered a derivative in accordance with current accounting guidelines because of the reset
conversion features of the 2015-2016 Notes. As of June 30, 2020, the remaining balance of the 2015-2016 Notes 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 June 30, 2020,
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. As of June 30, 2020, the remaining balance on the Sep 2016 Note was $430,896.
The Company issued two (2) unsecured
convertible promissory notes (the “Apr & May 2018 Notes”), in the aggregate amount of $300,000 on April 2, 2018
and May 31, 2018. The Apr & May 2018 Notes had maturity dates of April 2, 2019 and May 31, 2019, respectively. The Apr &
May 2018 Notes bear interest at 10% per year. The Apr & May 2018 Notes may be converted into shares of the Company’s
common stock at a variable conversion price of 50% of the lesser of the lowest trading price twenty-five (25) trading days prior
to conversion. The conversion feature of the Apr & May 2018 Notes was considered a derivative in accordance with current accounting
guidelines because of the reset conversion features of the Notes. During the nine months ended September 30, 2019, the Company
issued 12,500 shares of common stock upon conversion of principal in the amount of $6,523, plus accrued interest of $4,727, with
a fair value loss on conversion of $16,250. On March 13, 2019, the Company entered into a settlement agreement with the investor
in the amount of $570,000, based on the outstanding balance due and payable under the Apr & May 2018 Notes. The Company set
up a reserve of 2,630,769 shares of common stock of the Company for issuance upon conversion by the investor of the amounts owed
under the Notes, in accordance with the terms of the Notes, including, but 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 six months ended June 30, 2020, the
Company issued 2,044,565 shares of common stock upon conversion of principal in the amount of $42,712, plus $20,994 default settlement
fees. As of June 30, 2020, the remaining balance on the Apr & May 2018 Notes were $402,675.
During the six months ended June 30, 2020, the Company
did not recognize a gain or loss on conversion of debt since the conversions occurred within the terms of the agreement.
Promissory Note Payable
The Company received an unsecured
promissory note on February 6, 2020 for the sum of $5,000. The note bears interest at 10% per annum, with a maturity date of February
6, 2021. The note and accrued interest is to be paid upon the maturity date. The funds were used for operating expenses.
We evaluated the financing transactions
in accordance with ASC Topic 815, Derivatives and Hedging, and determined that the conversion feature of the convertible promissory
notes was not afforded the exemption for conventional convertible instruments due to its variable conversion rate. The note has
no explicit limit on the number of shares issuable so they did not meet the conditions set forth in current accounting standards
for equity classification. The Company elected to recognize the note under paragraph 815-15-25-4, whereby, there would be a separation
into a host contract and derivative instrument. The Company elected to initially and subsequently measure the note in its entirety
at fair value, with changes in fair value recognized in earnings. The Company recorded a derivative liability representing the
imputed interest associated with the embedded derivative. The derivative liability is adjusted periodically according to the stock
price fluctuations.
The derivative liability recognized
in the financial statements As of June 30, 2020 was $14,421,908.
|
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 six months ended June 30, 2020.
|
|
Six Months Ended
|
|
|
|
June 30,
|
|
|
|
2020
|
|
|
2019
|
|
Equipment Contracts
|
|
$
|
1,397,335
|
|
|
$
|
1,199,080
|
|
Component Sales
|
|
|
706,840
|
|
|
|
488,265
|
|
Services Sales
|
|
|
43,263
|
|
|
|
59,620
|
|
Licensing Fees
|
|
|
|
|
|
|
10,000
|
|
|
|
$
|
2,147,438
|
|
|
$
|
1,756,965
|
|
Revenue recognition for other
sales arrangements, such as sales for components, service and licensing fees will remain materially consistent.
Contract assets represents revenues
recognized in excess of amounts billed on contracts in progress. Contract liabilities represents billings in excess of revenues
recognized on contracts in progress. Assets and liabilities related to long-term contracts are included in current assets and current
liabilities in the accompanying balance sheets, as they will be liquidated in the normal course of the contract completion. The
contract asset for the six months ended June 30, 2020 was $116,078 and for the year ending December 31, 2019 was $26,287. The contract
liability for the six months ended June 30, 2020 was $193,459 and for the year ending December 31, 2019 $428,009.
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Convertible Note Receivable
The Company purchased a 10% convertible
note in the amount of $80,000, through a private placement with Water Technologies International, Inc (“WTII”). The
Note is convertible into common stock of WTII at a price of 65% of the lowest trading price for the ten (10) trading days immediately
prior to the conversion date. The conversion price shall not be lower than a price of $0.0001 per share. As of June 30, 2020, the
note included principal of $80,000 plus accrued interest of $45,880.
Fair value investment in Securities
|
|
On May 15,
2018, the Company received 4,000 shares of WTII preferred stock for the use of OriginClear, Inc. technology associated with their
proprietary electro water separation system. The stock was valued at fair market value of $0.0075 for a price of $30,000 on the
date of issuance. The preferred shares are convertible into 4,000,000 shares of common stock. The Company 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 June 30, 2020, the
fair value of the preferred shares was $6,400.
Restricted Asset
During the six months ended June 30, 2020, the Company sold
Series M Preferred stock, whereby, $88,532 of funds were held in escrow for the purchase of Series M Preferred Stock. As of June
30, 2020, an aggregate of $25,750 in Series M Preferred Stock had not yet been issued.
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Secured Loans Payable
The Company entered into short
term loans with various lenders for capital expansion secured by the Company’s assets in the amount of $1,749,970, which
included finance cost of $624,810. The finance cost was fully amortized over the terms of the loans, which have various maturity
dates ranging from October 2018 through February 2019. The term of the loans ranged from two months to six months. The net balance
as of June 30, 2020 was $352,369.
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 $44,625, leaving
a balance of $142,429 as of June 30, 2020.
Loan Payable-Borrowings
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 pursue and file all required applications for forgiveness, although no assurance is provided that forgiveness
for all or any portion of the PPP Loan will be obtained.
The Company also received an
EIDL grant in the amount of $10,000 on April 30, 2020 and a loan in the amount of $150,000 on June 10, 2020 from the Small Business
Administration. Interest on the loan will accrue at the rate of 3.75% and monthly instalment payments in the amount of $731 will
begin in June, 2021, twelve months from receipt of the loan. Both the $150,000 loan and the $10,000 grant were used solely for
working capital.
The Company entered into a capital
lease for the purchase of equipment during the six months ended June 30, 2020. The lease is for a sixty (60) month term, with monthly
payments of $757 per month, and a purchase option at the end of the lease for $1.00.
As of June 30, 2020, the maturities
are summarized as follows:
Capital lease
|
|
$
|
21,617
|
|
Less current portion
|
|
|
9,088
|
|
Total long-term liabilities
|
|
$
|
12,529
|
|
Long term maturities for the
next two years are as follows:
Period Ending June 30,
|
2021
|
|
|
9,088
|
|
2022
|
|
|
3,441
|
|
|
|
$
|
12,529
|
|
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.
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11.
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COMMITMENTS AND CONTINGENCIES
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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 six months ending June
30, 2020.
Litigation
In February 2019, a Complaint
was filed in the Superior Court for the State of California, for breach of contract, common counts for sums due for services allegedly
performed, and fraud. The Complaint was filed by RDI Financial, LLC (“RDI”), an assignee of Interdependence, Inc.,
and named the Company and our developmental subsidiary, WaterChain, Inc., as Defendants. RDI claimed that its assignor, Interdependence,
Inc., entered into a contract with the Defendants for Interdependence to provide reputation and professional relationship management
services. RDI claimed that Interdependence provided the services and that the Company was required to make certain payments of
cash and our capital stock to Interdependence, but did not do so. RDI claims to be entitled to enforce the contract as the assignee,
and is demanding monetary damages in the aggregate amount of $630,000.
While filed in February 2019, the
Company and WaterChain were unaware of the suit until September of 2019, when they received notice of a default judgment. Litigation
counsel was engaged, the absence of prior notice, service of the suit and an improper default promptly challenged, and in October
2019 the Court vacated the default and judgment, and granted the Company and WaterChain leave to file an Answer and Cross-Complaint.
Through these filings, the Company and WaterChain, Inc. contest the allegations and claims in the Complaint, and deny that Interdependence
performed the required services and contends that we overpaid Interdependence $40,000 for whatever work was done. Specifically,
in November 2019, an Answer was filed denying the claims in the Complaint, along with a Cross-Complaint alleging fraudulent inducement
to enter into the contract, negligent misrepresentations, breach of contract, and to rescind the underlying contract. Specifically,
we have alleged that Interdependence misrepresented the nature and scope of the services which were to be provided and ability
to provide them, misrepresented the results they would obtain from providing such services, and also failed to provide us with
the services as required by the contract such that Interdependence was overpaid based on what it in fact did. For those reasons,
and prior to any litigation, we terminated the contract for non-performance.
On February 6, 2020, the Superior
Court set April 4, 2021 as the trial date for this matter. The Company and WaterChain are appropriately defending against the allegations
and pursuing affirmative recovery on the cross-complaint. The Company disputes all claims and is appropriately litigating its defenses
and pursuing recovery on its cross-suit. The parties are in the preliminary stages of settlement negotiations with the Plaintiff
RDI and Interdependence, but we can provide no assurance that any settlement will be reached nor can we provide any assurances
regarding any terms of such settlement, nor has a settlement been offered. 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 we may incur in finally resolving or adjudicating this lawsuit.
Management has evaluated subsequent
events according to the requirements of ASC TOPIC 855 and has determined that there are the following subsequent events:
On July 1, 2020, the Company filed an Amended and
Restated Certificate of Designation of Series M Preferred Stock (the “Amended Series M COD”) with the Secretary of
State of Nevada. The Amended Series M COD amended the terms of the Company’s Series M Preferred Stock, such that, the Series
M Preferred Stock will not be convertible into common stock, and the Company may redeem outstanding shares of Series M Preferred
Stock at any time at a redemption price of $37.50 per share (150% of the stated value of $25.00), plus any accrued but unpaid dividends.
Per electing and qualifying
for the Restricted Stock Grant Agreement alternate vesting schedule, on July 2, 2020, the Company issued to Mr. Eckelberry an aggregate
of 115,344 shares of common stock relating to his May 2016 Restricted Stock Grant Agreement.
Between July 2, 2020 and August
12, 2020, the Company entered into subscription agreements with certain accredited investors pursuant to which the Company sold
an aggregate of 980 shares of the Company’s Series O preferred stock for an aggregate purchase price of $980,000. The Company
also issued an aggregate of 245 shares of its Series P preferred stock to the investors.
Between July 8, 2020, and August
11, 2020 holders of convertible promissory notes converted an aggregate principal and interest amount of $89,360 into an aggregate
of 3,030,660 shares of the Company’s common stock.
Between July 14, 2020 and August
3, 2020, the Company issued to consultants and one employee an aggregate of 594,462 shares of the Company’s common stock
for services.
On July 17, 2020, a holder of
Series J Preferred Stock converted an aggregate of 15 Series J shares into an aggregate of 391,468 shares, including make-good
shares, of the Company’s common stock.
Between August 3, 2020 and August
14, 2020, holders of Series L Preferred Stock converted an aggregate of 48 Series L shares into an aggregate of 980,132 shares,
including make-good shares, of the Company’s common stock.
On August 3, 2020, a holder of Series P Preferred
Stock converted an aggregate of 10 Series P shares into an aggregate of 570,475 shares, including make-good shares, of the Company’s
common stock.