10-Q 1 f10q0920_originclear.htm QUARTERLY REPORT

 

 

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:  September 30, 2020

 

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

 

For the transition period from __________ to __________

 

Commission File Number: 333-147980

 

ORIGINCLEAR, INC.

(Exact name of registrant as specified in its charter)

 

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

 

13575 58th Street North, Suite 200

Clearwater, FL 33760

(Address of principal executive offices, Zip Code)

 

(323) 939-6645

(Registrant’s telephone number, including area code)

 

Securities registered pursuant to Section 12(b) of the Act:

 

Title of each class   Ticker symbol(s)   Name of each exchange on which registered
N/A   N/A   N/A

  

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

 

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

 

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.

  

Large accelerated filer   Accelerated filer
Non-accelerated filer   Smaller reporting company
      Emerging growth company

 

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐

 

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ☐  No ☒

 

As of November 20, 2020 there were 49,770,265 shares of common stock, par value $0.0001 per share, issued and outstanding.

 

 

 

 

 

TABLE OF CONTENTS

 

    Page
PART I
     
Item 1. Financial Statements. 1
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations. 23
Item 3. Quantitative and Qualitative Disclosures About Market Risk. 33
Item 4. Controls and Procedures. 33
     
PART II
     
Item 1. Legal Proceedings. 34
Item 1A. Risk Factors. 35
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds. 35
Item 3. Defaults Upon Senior Securities. 35
Item 4. Mine Safety Disclosures. 35
Item 5. Other Information. 35
Item 6. Exhibits. 35
     
SIGNATURES 36

 

i 

 

 

PART I - FINANCIAL INFORMATION

 

ORIGINCLEAR, INC. AND SUBSIDIARIES 

CONDENSED CONSOLIDATED BALANCE SHEETS

  

   September 30,
2020
   December 31,
2019
 
   (Unaudited)     
ASSETS        
         
CURRENT ASSETS        
Cash  $757,945   $490,614 
Restricted cash - Preferred shares   5,100    - 
Contracts receivable, less allowance for doubtful accounts of $0 and $6,996 respectively   503,479    522,911 
Contract assets   407    26,287 
Convertible note receivable   129,880    117,879 
Other receivable   4,400    2,500 
Prepaid expenses   33,552    47,483 
           
TOTAL CURRENT ASSETS   1,434,763    1,207,674 
           
NET PROPERTY AND EQUIPMENT   270,563    117,069 
           
OTHER ASSETS          
Fair value investment-securities   10,000    9,600 
Trademark   4,467    4,467 
Security deposit   -    3,500 
           
TOTAL OTHER ASSETS   14,467    17,567 
           
TOTAL ASSETS  $1,719,793   $1,342,310 
           
LIABILITIES AND SHAREHOLDERS’ DEFICIT          
           
Current Liabilities          
Accounts payable and other payable  $1,308,000   $1,144,545 
Accrued expenses   1,352,018    1,163,146 
Cumulative preferred stock dividends payable   205,204    92,472 
Contract liabilities   454,681    428,009 
Capital lease, current portion   9,088    9,088 
Customer deposit   146,453    136,765 
Warranty reserve   20,000    20,000 
Loan payable, merchant cash advance, net of finance fees of $0 and $12,566 respectively   342,896    427,214 
Loan payable, related party   119,016    187,054 
Loans payable, SBA   505,000    - 
Loan payable, other related party   5,000    - 
Derivative liabilities   8,012,677    31,640,470 
Series F 8% Convertible Preferred Stock in default, 390 and 0 shares issued and outstanding, redeemable value of $390,000 and $0, respectively   390,000    - 
Series F 8% Convertible Preferred Stock, extended through September 1, 2022, 100 and 1,678 shares issued and outstanding, redeemable value of $100,000 and $1,678,000, respectively   100,000    1,678,000 
Convertible promissory notes, net of discount of $0 and $146,005, respectively   1,000,619    2,879,325 
           
Total Current Liabilities   13,970,652    39,806,088 
           
Long Term Liabilities          
Capital lease, long term portion   10,257    17,073 
Series G 8% Convertible Preferred Stock, 430 and 530 shares issued and outstanding, respectively, redeemable value of $430,000 and $530,000, respectively   430,000    530,000 
Series I 8% Convertible Preferred Stock, 797 and 797 shares issued and outstanding, respectively, redeemable value of $797,400 and $797,400, respectively   797,400    797,400 
Series K 8% Convertible Preferred Stock, 3,160 and 2,001 shares issued and outstanding, respectively, redeemable value of $3,160,417 and $2,000,650, respectively   3,160,417    2,000,650 
Convertible promissory notes, net of discount of $0 and $0, respectively   2,191,004    552,975 
           
Total Long Term Liabilities   6,588,078    3,898,098 
           
Total Liabilities   20,559,730    43,704,186 
           
COMMITMENTS AND CONTINGENCIES (See Note 11)               
           
Series J Convertible Preferred Stock, 279 and 349 shares issued and outstanding, respectively, redeemable value of redeemable value of $279,000 and $348,700, respectively   279,000    348,700 
Series L Convertible Preferred Stock, 1,286 and 1,000 shares issued and outstanding respectively, redeemable value of $1,286,000 and $1,000,325, respectively   1,286,000    1,000,325 
Series M Convertible Preferred Stock, 39,616 and 34,200 shares issued and outstanding, respectively, redeemable value of $990,400 and 855,000 shares issued and outstanding, respectively   990,400    855,000 
Series P Convertible Preferred Stock, 301 and 0 shares issued and outstanding, respectively, redeemable value of $301,000 and $0, respectively   301,000    - 
Series O 8% Convertible Preferred Stock, 1,245 and 0 shares issued and outstanding, respectively, redeemable value of $1,245,000 and $0, respectively   1,245,000    - 
Series Q 12% Convertible Preferred Stock, 1,188 and 0 shares issued and outstanding, respectively, redeemable value of $1,188,000 and $0, respectively   1,188,000    - 
           
 SHAREHOLDERS’ DEFICIT          
Preferred stock, $0.0001 par value, 550,000,000 shares authorized 1,000 shares of Series C issued and outstanding, respectively   -    - 
32,500,000 and 38,500,000 shares of Series D-1 issued and outstanding, respectively   3,250    3,850 
1,537,213 and 2,137,649 shares of Series E issued and outstanding, respectively   154    217 
Subscription payable to purchase Series M preferred stock   5,000    - 
Subscription payable   100,000    - 
Preferred treasury stock,1,000  and 1,000 shares outstanding, respectively   -    - 
Common stock, $0.0001 par value, 16,000,000,000 shares authorized 31,436,122 and 4,854,993 equity shares issued and outstanding, respectively   3,144    486 
Additional paid in capital - Common stock   62,696,576    62,711,339 
Accumulated other comprehensive loss   (133)   (134)
Accumulated deficit   (86,937,328)   (107,281,659)
           
TOTAL SHAREHOLDERS’ DEFICIT   (24,129,337)   (44,565,901)
           
TOTAL LIABILITIES AND SHAREHOLDERS’ DEFICIT  $1,719,793   $1,342,310 

 

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

 

1

 

 

ORIGINCLEAR, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

 FOR THE THREE AND NINE MONTHS ENDED SEPTEMBER 30, 2020 AND 2019

(Unaudited)

 

   Three Months Ended   Nine Months Ended 
   September 30,
2020
   September 30,
2019
   September 30,
2020
   September 30,
2019
 
                 
Sales  $917,320   $939,468   $3,064,758   $2,696,433 
                     
Cost of Goods Sold   934,708    858,828    2,716,582    2,406,139 
                     
Gross Profit   (17,388)   80,640    348,176    290,294 
                     
Operating Expenses                    
Selling and marketing expenses   339,759    409,825    1,053,559    1,247,332 
General and administrative expenses   782,810    595,181    1,853,760    1,766,496 
Research and development   29,334    29,334    83,400    80,094 
Depreciation and amortization expense   14,431    10,955    39,892    32,788 
                     
Total Operating Expenses   1,166,334    1,045,295    3,030,611    3,126,710 
                     
Loss from Operations   (1,183,722)   (964,655)   (2,682,435)   (2,836,416)
                     
OTHER INCOME (EXPENSE)                    
Other income   4,001    4,000    12,521    28,980 
Gain on conversion of preferred stock   18,066    -    24,129    - 
Unrealized gain(loss) on investment securities   3,600    (4,400)   400    (8,800)
Gain (Loss) on settlement of convertible notes   -    33,298    -    (308,587)
Commitment fee   -    (70,624)   -    (238,959)
Loss on conversion of debt   -    -    -    (254,584)
Gain (Loss) on net change in derivative liability and conversion of debt   6,409,231    (137,989)   23,627,793    (4,275,963)
Interest expense   (233,010)   (80,505)   (638,077)   (423,711)
                     
TOTAL OTHER (EXPENSE) INCOME   6,201,888    (256,220)   23,026,766    (5,481,624)
                     
NET INCOME (LOSS)  $5,018,166   $(1,220,875)  $20,344,331   $(8,318,040)
                     
PREFERRED STOCK DIVIDENDS  $-   $(74,627)  $-   $(194,510)
                     
NET AVAILABLE TO SHAREHOLDERS  $5,018,166   $(1,295,502)  $20,344,331   $(8,512,550)
                     
BASIC EARNINGS (LOSS) PER SHARE ATTRIBUTABLE TO SHAREHOLDERS’  $0.27   $(0.54)  $1.75   $(5.11)
                     
DILUTED EARNINGS (LOSS) PER SHARE ATTRIBUTABLE TO SHAREHOLDERS’  $0.03   $(0.03)  $0.15   $(5.11)
                     
WEIGHTED-AVERAGE COMMON SHARES OUTSTANDING,                    
BASIC   18,643,531    2,259,993    11,598,453    1,626,550 
                     
DILUTED   146,074,997    2,259,993    139,029,918    1,626,550 

 

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

 

2

 

 

ORIGINCLEAR, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF SHAREHOLDERS’ DEFICIT

FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2020 AND 2019

 

    NINE MONTHS ENDED SEPTEMBER 30, 2019  
                            Additional     Accumulated              
    Preferred stock     Common stock     Paid-in Capital
Common
    Other
Comprehensive
    Accumulated        
    Shares     Amount     Shares     Amount     Stock     loss     Deficit     Total  
Balance at December 31, 2018     40,640,649     $ 4,064       875,244     $ 88     $ 63,179,433     $ (134 )   $ (79,807,981 )   $ (16,624,530 )
                                                                 
Common stock issuance for conversion of debt and accrued interest     -       -       1,396,553       139       1,667,141       -       -       1,667,280  
                                                                 
Common stock issued at fair value for services     -       -       744,333       74       623,067       -       -       623,141  
                                                                 
Common stock issued through a private placement for purchase of Series G Preferred stock     -       -       82,799       8       (8 )     -       -       -  
                                                                 
Cumulative preferred stock dividend     -       -       -       -       (167,496 )     -       -       (167,496 )
                                                                 
Gain on conversion of debt     -     -       -       -       (774,075)       -       -       (774,075)  
                                                                 
Other comprehensive gain     -       -       -       -       -       1       -       1  
                                                                 
Common stock reverse split share adjustment     -       -       522       1       (1)       -         -     -  
                                                                 
Net loss     -       -       -       -       -       -       (8,318,040 )     (8,318,040 )
                                                                 
Balance at September 30, 2019 (unaudited)     40,640,649     $ 4,064       3,099,451     $ 310     $ 64,528,061     $ (133 )   $ (88,126,021 )   $ (23,593,719 )

 

   NINE MONTHS ENDED SEPTEMBER 30, 2020     
                           Accumulated             
   Preferred stock   Common stock   Additional
Paid-in
   Subscription   Other
Comprehensive
   Accumulated       Mezzanine 
   Shares   Amount   Shares   Amount   Capital   Payable   loss   Deficit   Total   Equity 
Balance at December 31, 2019   40,674,799    4,067    4,854,993    486    64,915,364    -    (134)   (107,281,659)   (42,361,876)  $2,204,025 
                                                   
Rounding        1    -    (1)        -    -    -    -    - 
                             -                     
Common stock issuance for conversion of debt and accrued interest   -    -    9,732,328    973    277,197    -    -    -    278,170    - 
                                                   
Common stock issued at fair value for services   -    -    3,297,275    330    263,667    -    -    -    263,997    - 
                                                   
Common stock issued for conversion of Series D-1 Preferred stock   (6,000,000)   (600)   295,141    30    24,348    -    -    -    23,778    - 
                                                   
Common stock issued for conversion of Series E Preferred stock   (602,436)   (60)   30,124    3    57    -    -    -    -    - 
                                                   
Common stock issued for conversion of Series J Preferred stock   (70)   -    2,313,689    231    (231)   -    -    -    -    (69,700)
                                                   
Common stock issued for conversion of Series L Preferred stock   (295)        10,038,055    1,004    (1,004)   -    -    -    -    285,675
                                                   
Common stock issued for conversion of Series M Preferred stock   (320)   -    137,052    14    (14)        -    -    -    135,400
                                                   
Common stock issued for dividends on Series O Preferred stock   -    -    166,990    17    (17)   -    -    -    -    1,245,000 
                                                   
Common stock issued for conversion of Series P Preferred stock   (10)   -    570,475    57    (57)   -    -    -    -    301,000
                                                   
Issuance of Series M Preferred stock through a private placement   -    -    -    -    145,250    5,000    -    -    150,250    - 
                                                   
Exchange of Series F Preferred Stock for Series Q Preferred Stock   -    -    -    -    -    -    -    -    -    1,188,000 
                                                   
Subscription payable - common stock   -    -    -    -    -    100,000    -    -    100,000    - 
                                                   
Reclassification of non-cash adjustment   -    -    -    -    (46,260)   -    -    -    (46,260)   - 
                                                   
Reclassification of preferred stock   (34,455)   (4   -    -    -    -    -    -    -    - 
                                                   
Reclassification from equity to mezzanine   -    -    -    -    (2,856,397)   -    -    -    (2,856,397)   - 
                                                   
Gain on conversion of Preferred stock   -    -    -    -    (24,129)   -    -    -    (24,129)   - 
                                                   
Comprehensive gain   -    -    -    -    -         1    -    1    - 
                                                   
Net Income   -    -    -    -    -         -    20,344,331    20,344,331    - 
Balance at September 30, 2020 (unaudited)   34,037,213   $3,404    31,436,122   $3,144   $62,697,774   $105,000   $(133)  $(86,937,328)  $(24,128,135)  $5,289,400 

 

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

 

3

 

 

ORIGINCLEAR, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2020 AND 2019

(Unaudited)

 

   Nine Months Ended 
   September 30,
2020
   September 30,
2019
 
CASH FLOWS FROM OPERATING ACTIVITIES:        
Net Income (loss)  $20,344,331   $(8,318,040)
Adjustment to reconcile net loss to net cash used in operating activities          
Depreciation and amortization   39,892    32,788 
Common and preferred stock issued for services   287,775    623,141 
(Gain) Loss on net change in valuation of derivative liability   (23,627,793)   4,275,963 
Loss on conversion of debt   -    254,585 
Loss on settlement of debt   -    308,587 
Debt discount recognized as interest expense   -    146,005 
Net unrealized (gain)loss on fair value of security   (400)   8,800 
Gain on conversion of preferred stock   (24,129)   - 
Amortization of financing fees and cost   -    135,358 
Interest receivable on convertible note receivable   (12,000)   - 
Change in Assets (Increase) Decrease in:          
Contracts receivable   19,432    (145,298)
Contract asset   25,880    97,712 
Inventory asset   -    13,736 
Prepaid expenses and other assets   13,831    3,895 
           
Change in Liabilities Increase (Decrease) in:          
Accounts payable   79,454    (173,708)
Accrued expenses   180,606    30,423 
Contract liabilities   26,672    205,257 
Customer deposit   9,688    (6,738)
Deferred income   -    71,917 
           
NET CASH USED IN OPERATING ACTIVITIES   (2,636,761)   (2,435,617)
           
CASH FLOWS USED FROM INVESTING ACTIVITIES:          
Net change in fair value investment - security        (28,979)
Purchase of fixed assets   (9,386)   (4,945)
           
CASH USED IN INVESTING ACTIVITIES   (9,386)   (33,924)
           
CASH FLOWS FROM FINANCING ACTIVITIES:          
Payments on capital lease   (6,816)   (7,573)
Payments on promissory note payable, related party   -    (74,977)
Loan payable financing, net   (84,318)   (107,250)
Loan payable, related party, net   (68,038)   (13,264)
Loans payable   510,000    - 
Net cumulative preferred stock dividends payable   112,732    49,897 
Payment on redemption of preferred stock   -    (65,000)
Net proceeds for issuance of preferred stock for cash - equity   150,250    - 
Net proceeds for issuance of preferred stock for cash - liability   2,299,668    2,592,490 
           
NET CASH PROVIDED BY FINANCING ACTIVITIES   2,913,478    2,374,323 
           
NET (DECREASE) INCREASE IN CASH   267,331    (95,218)
           
CASH BEGINNING OF YEAR   490,614    609,144 
           
CASH END OF YEAR  $757,945   $513,926 
           
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION          
Interest paid  $19,108   $16,926 
Taxes paid  $-   $- 
           
SUPPLEMENTAL DISCLOSURES OF NON CASH TRANSACTIONS          
Common stock issued at fair value for conversion of debt, plus accrued interest, and other fees  $278,170   $893,202 
Reclassification of non-cash adjustment of preferred stock additional paid in capital  $(46,260)  $- 
Other payable for fixed asset with common stock subscription  $184,000   $- 
Settlement of derivative  $-   $1,176,961 
Preferred stock converted to common stock  $1,308   $- 
Stock issued on private placement  $-   $8 

 

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

 

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ORIGINCLEAR, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS-UNAUDITED

SEPTEMBER 30, 2020

 

1. The accompanying unaudited condensed consolidated financial statements of OriginClear, Inc. (the “Company”) have been prepared in accordance with accounting principles generally accepted in the United States of America for interim financial information and with the instructions to Form 10-Q and Rule 10-01 of Regulation S-X.  Accordingly, they do not include all of the information and footnotes required by generally accepted accounting principles for complete financial statements. In the opinion of management, all normal recurring adjustments considered necessary for a fair presentation have been included.  Operating results for the nine months ended September 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.

 

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 nine months ended September 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 $3,064,758 during the nine months ended September 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.

 

2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICES

 

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

 

Principles of Consolidation

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

 

Cash and Cash Equivalent

The Company considers all highly liquid investments with an original maturity of three months or less to be cash equivalents. As of September 30, 2020, the Company had a restricted cash balance of $5,100 consisting of Preferred Series M investments in an escrow account.

 

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Use of Estimates

The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities, disclosure of contingent assets and liabilities at the date of the financial statements, and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. Significant estimates include estimates used to review the Company’s impairments and estimations of long-lived assets, revenue recognition on percentage of completion type contracts, allowances for uncollectible accounts, warranty reserves, inventory valuation, derivative liabilities and other conversion features, fair value investments, valuations of non-cash capital stock issuances and the valuation allowance on deferred tax assets. The Company bases its estimates on historical experience and on various other assumptions that are believed to be reasonable in the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. Actual results may differ from these estimates under different assumptions or conditions.

 

Net Earnings (Loss) per Share Calculations

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

 

   For the Nine Months Ended
September 30,
 
   2020   2019 
Income (Loss) to common shareholders (Numerator)  $

20,344,331

   $(8,512,550)
           
Basic weighted average number of common shares outstanding (Denominator)   11,598,453    1,626,550 
           
Diluted weighted average number of common shares outstanding (Denominator)   139,029,918    1,626,550 

 

Nine months ended September 30, 2020 

The Company has excluded 122,044 shares of common stock issuable upon exercise of warrants, because their impact on the loss per share is anti-dilutive.

 

The Company has included 127,431,465 shares of common stock issuable from convertible debt of $3,191,623, and preferred stock for the nine months ended September 30, 2019, because their impact on the loss per share is dilutive.

 

Nine months ended September 30, 2019

The Company has excluded 122,044 shares of common stock issuable upon exercise of warrants, shares of common stock issuable pursuant to outstanding convertible debt of $3,432,300 and shares issuable from convertible preferred stock for the nine months ended September 30, 2019, 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.

 

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

 

Contract Receivable

The Company bills its customers in accordance with contractual agreements. The agreements generally require billing to be on a progressive basis as work is completed. Credit is extended based on evaluation of clients’ financial condition and collateral is not required. The Company maintains an allowance for doubtful accounts for estimated losses that may arise if any customer is unable to make required payments. Management performs a quantitative and qualitative review of the receivables past due from customers on a monthly basis. The Company records an allowance against uncollectible items for each customer after all reasonable means of collection have been exhausted, and the potential for recovery is considered remote. There was no allowance for doubtful accounts as of September 30, 2020 and December 31, 2019, respectively. The net contract receivable balance was $503,479 and $522,911 at September 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 September 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 $83,400 and $80,094 for the nine months ended September 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   
Machinery and equipment  5-10 years
Furniture, fixtures and computer equipment  5-7 years
Vehicles  3-5 years
Leasehold improvements  2-5 years

 

Long-lived assets held and used by the Company are reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. In the event that facts and circumstances indicate that the cost of any long-lived assets may be impaired, an evaluation of recoverability would be performed following generally accepted accounting principles.

 

During the nine months ended September 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 September 30, 2020, the Company made payments on the accounts payable of $6,000.

 

Depreciation expense during the nine months ended September 30, 2020 and 2019, respectively was $39,892 and $32,788.

 

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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 September 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:

 

  Level 1, defined as observable inputs such as quoted prices for identical instruments in active markets;
     
  Level 2, defined as inputs other than quoted prices in active markets that are either directly or indirectly observable such as quoted prices for similar instruments in active markets or quoted prices for identical or similar instruments in markets that are not active; and
     
  Level 3, defined as unobservable inputs in which little or no market data exists, therefore requiring an entity to develop its own assumptions, such as valuations derived from valuation techniques in which one or more significant inputs or significant value drivers are unobservable. 

 

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The following table presents certain investments and liabilities of the Company’s financial assets measured and recorded at fair value on the Company’s balance sheets on a recurring basis and their level within the fair value hierarchy as of September 30, 2020.

 

   Total   (Level 1)   (Level 2)   (Level 3) 
                 
Investment at fair value-securities  $10,000   $10,000   $-   $- 
Total Assets measured at fair value  $10,000   $10,000   $-   $- 

 

   Total   (Level 1)   (Level 2)   (Level 3) 
                 
Derivative Liability  $8,012,677   $-   $-   $8,012,677 
Total liabilities measured at fair value  $8,012,677   $-   $-   $8,012,677 

 

The following is a reconciliation of the derivative liability for which level 3 inputs were used in determining the approximate fair value:

 

Balance as of January 1, 2020  $31,640,470 
Gain on conversion of debt and change in derivative liability   (23,627,793)
Balance as of September 30, 2020  $8,012,677 

 

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:

 

   9/30/2020
Risk free interest rate  0.08% - 0.16%
Stock volatility factor  32.0% - 249.0%
Weighted average expected option life  6 months - 5 years
Expected dividend yield  None

 

Segment Reporting

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

  

Marketable Securities

The Company adopted ASU 2016-01, “Financial Instruments – Recognition and Measurement of Financial Assets and Financial Liabilities.” ASU 2016-01 requires investments (except those accounted for under the equity method of accounting, or those that result in consolidation of the investee) to be measured at fair value with changes in fair value recognized in net income. It requires public business entities to use the exit price notion when measuring the fair value of financial instruments for disclosure purpose, and separate presentation of financial assets and financial liabilities by measurement category and form of financial asset. It eliminates the requirement for public business entities to disclose the method(s) and significant assumptions used to estimate the fair value that is required to be disclosed for financial instruments measured at amortized cost. The Company has evaluated the potential impact this standard may have on the condensed consolidated financial statements and determined that it had a significant impact on the condensed consolidated financial statements. The Company accounts for its investment in Water Technologies International, Inc. as available-for-sale securities, and the unrealized gain on the available-for-sale securities is recognized in net income.

 

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.

 

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3. CAPITAL STOCK

 

Preferred Stock

 

Series C

The Company has designated 1,000 shares of its preferred stock as Series C Preferred Stock. Such 1,000 shares are outstanding and are held by T. Riggs Eckelberry, our chief executive officer. Shares of Series C Preferred Stock are not convertible to common stock, are not entitled to receive dividends, and do not have a liquidation preference. The Series C Preferred Stock have no pre-emptive or subscription rights, and there is no sinking fund provision applicable to the Series C Preferred Stock. The Series C Preferred Stock entitles the holder to 51% of the total voting power of our stockholders. Share of Series C Preferred Stock will automatically be redeemed by the Company at par value on the first to occur of the following events: (i) the date that Mr. Eckelberry ceases to serve as officer, director or consultant of the Company, or (ii) on the date that the Company’s shares of common stock first trade on any national securities exchange provided that (a) the listing rules of any such exchange prohibit preferential voting rights of a class of securities of the Company, or (b) listing on any such national securities exchange is conditioned upon the elimination of the preferential voting rights of the Series C Preferred Stock. As of September 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 nine months ended September 30, 2020, the Company issued 295,141 shares of common stock upon conversion of 6,000,000 shares of Series D-1 Preferred Stock with a value of $23,778 using the closing stock price on grant date. The Company did not recognize any gain or loss on conversion, as the shares were converted within the terms of the agreement. As of September 30, 2020, there were 32,500,000 shares of Series D-1 Preferred Stock issued and outstanding.

  

Series E

The Company has designated 4,000,000 shares of its preferred stock as Series E Preferred Stock. Each share of Series E Preferred Stock is convertible into the greater of (A) 0.05 shares of common stock and (B) the number of shares the holder would have received pursuant to the holder’s subscription agreement if the preferred shares were priced based on the average closing sale price of three trading days prior to the date the holder requests a conversion, provided the lowest price for which an adjustment will be made is 50% of the purchase price paid by any purchaser of the Series E Preferred Stock. The Series E Preferred Stock may not be converted to common stock to the extent such conversion would result in the holder beneficially owning more than 4.99% of our outstanding common stock. The holders of outstanding shares of Series E Preferred Stock are not entitled to receive dividends, and do not have a liquidation preference. The Series E Preferred Stock have no pre-emptive or subscription rights, and there is no redemption or sinking fund provisions applicable to the Series E Preferred Stock. The Series E Preferred Stock does not have voting rights, except as required by law and with respect to certain protective provisions set forth in the Certificate of Designation of Series E Preferred Stock. As of December 31, 2019, there were 2,137,649 shares of Series E Preferred Stock issued and outstanding. During the nine months ended September 30, 2020, the Company issued 30,124 shares of common stock upon conversion of 602,436 shares of Series E Preferred Stock. The Company did not recognize any gain or loss on conversion, as the shares were converted within the terms of the agreement. As of September 30, 2020, there were 1,537,213 shares of Series E Preferred Stock issued and outstanding.

 

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Series F

The Company has designated 6,000 shares of its preferred stock as Series F Preferred Stock. The Series F Preferred Stock has a stated value of $1,000 per share. The Series F Preferred Stock is not convertible into common stock. The holders of outstanding shares of Series F Preferred Stock are entitled to quarterly dividends at the annual rate of 8% of the stated value, in preference to any dividends on the common stock. The Series F Preferred Stock has a liquidation preference equal to the stated value plus any accrued but unpaid dividends, in preference to any other series of capital stock of the Company. The Series F Preferred Stock has no pre-emptive or subscription rights, and there is no sinking fund provision applicable to the Series F Preferred Stock. The Series F Preferred Stock does not have voting rights, except as required by law. The Company was 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. During the nine months ended September 30, 2020, the Company exchanged 1,188 shares of Series F Preferred Stock for 1,188 shares of Series Q preferred shares. As of September 30, 2020, there were 490 shares of Series F Preferred Stock issued and outstanding and the Company accrued dividends in the amount of $28,226. As of September 30, 2020, a holder of 100 of such outstanding shares of Series F Preferred Stock, agreed that the Company would have no obligation to redeem such holder’s shares of Series F Preferred Stock prior to September 1, 2022, and the Company agreed to pay such holder, in addition to any dividends payable on such holder’s Series F Preferred Stock, an annual fee of 4% of the stated value of such holder’s shares of Series F Preferred Stock. Excluding such 100 shares, as of September 30, 2020, the Company had 390 outstanding shares of Series F Preferred Stock which the Company was required to, and failed to redeem on September 1, 2020, and was in default for an aggregate redemption price (equal to the stated value) of $390,000.

 

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 100 shares of Series K Preferred Stock. As of September 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 September 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. 

 

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Series J

The Company has designated 100,000 shares of its preferred stock as Series J Preferred Stock. The Series J Preferred Stock has a stated value of $1,000 per share. The Series J Preferred Stock is convertible into common stock in an amount determined by dividing the stated value by the conversion price, which is equal to lower of (a) the closing price of the common stock on the date the Company has banked funds and received and accepted executed subscription documents and the purchase price or (b) the average closing sale price of the common stock for the five trading days prior to the conversion date; certain prior investors are also entitled to certain make-good shares. The Series J Preferred Stock may not be converted to common stock to the extent such conversion would cause the holder to beneficially own more than 4.99% of the Company’s outstanding common stock. 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 nine months ended September 30, 2020, the Company issued 2,313,689 shares of common stock upon the conversion of 70 shares of Series J Preferred Stock. The Company recognized a loss on the conversion of the Series J Preferred Stock in the amount of $1,033. As of September 30, 2020, there were 279 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 nine months ended September 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 September 30, 2020, there were 3,160 shares of Series K Preferred Stock issued and outstanding. The Company accrued dividends in the amount of $63,208.

  

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. During the nine months ended September 30, 2020, the Company issued an aggregate of 580 shares of Series L Preferred Stock concurrently with the issuance of 1,160 shares of Series K Preferred Stock, and issued an aggregate of 10,038,055 shares of common stock upon conversion of 295 shares of Series L Preferred Stock. The Company recognized a gain on the conversion of the Series L Preferred Stock in the amount of $29,188. As of September 30, 2020, there was an aggregate of 1,286 shares of Series L Preferred Stock issued and outstanding.

 

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Series M

Pursuant to the Amended and Restated Certificate of Designation of Series M Preferred Stock filed with the Secretary of State of Nevada on July 1, 2020, the Company 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 nine months ended September 30, 2020, the Company reclassified noncash accrued interest of $46,260 associated with the exchange of a convertible note for Series M Preferred Stock, from preferred additional paid in capital, which affected the balance sheet only. During the nine months ended September 30, 2020, the Company issued an aggregate of 6,136 shares of Series M Preferred Stock for an aggregate price of $160,250, of which, $10,000 was returned and 400 shares were cancelled, leaving an aggregate price of $150,250 and shares issued of 5,736. As of September 30, 2020, an aggregate of $5,100 was held in an escrow account, of which $5,000 is a subscription payable. During the period ended September 30, 2020, prior to the terms of the Series M Preferred Stock being amended, such that the Series M Preferred Stock is not convertible into common stock, 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 September 30, 2020 there were 39,616 shares of Series M Preferred Stock issued and outstanding and accrued dividends in the amount of $65,076.

  

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 entitles holders to receive cumulative dividends (i) in cash at an annual rate of 8% of the stated value, and (ii) in shares of common stock of the Company (valued based on the conversion price as in effect on the last trading day of the applicable fiscal quarter) at an annual rate of 4% of the stated value, payable quarterly within 60 days from the end of such fiscal quarter. The Series O Preferred Stock has a liquidation preference equal to the stated value plus any accrued but unpaid dividends, in preference to the common stock. The Series O Preferred Stock has no preemptive or subscription rights, and there is no sinking fund provision applicable to the Series O Preferred Stock. The Series O Preferred Stock does not have voting rights except as required by law. The Series O Preferred Stock is convertible into common stock of the Company in an amount determined by dividing 200% of the stated value of the Series O Preferred Stock being converted by the conversion price, provided that, the Series O may not be converted into common stock to the extent such conversion would result in the holder beneficially owning more than 4.99% of the Company’s outstanding common stock. 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 cumulative dividends are recorded as interest expense. During the nine months ended September 30, 2020, the Company issued an aggregate of 1,245 shares of Series O Preferred Stock for an aggregate purchase price of $1,245,000. As of September 30, 2020, there were 1,245 shares of Series O Preferred Stock issued and outstanding, the Company issued an aggregate of 166,990 shares of common stock in prorated 4% annualized dividends, and accrued dividends in the amount of $15,659.

 

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 entitles holders to receive dividends on an as-converted basis with the Company’s common stock. The Series P Preferred Stock is convertible into shares of the Company’s common stock, on the terms and conditions set forth in the Certificate of Designation of Series P Preferred Stock, which includes certain make-good shares for certain prior investors, and provided that, the Series P Preferred Stock may not be converted into common stock to the extent such conversion would result in the holder beneficially owning more than 4.99% of the Company’s outstanding common stock. The Series P Preferred Stock entitles the holders to a payment on an as-converted and pari passu basis with the common stock upon any liquidation. The Series P Preferred Stock has no preemptive or subscription rights, and there is no sinking fund or redemption provisions applicable to the Series P Preferred Stock. The Series P Preferred Stock votes on an as-converted basis with the common stock, subject to the beneficial ownership limitation. During the nine months ended September 30, 2020, the Company issued an aggregate of 311 shares of Series P Preferred Stock concurrently with the issuance of 1,245 shares of Series O Preferred Stock. During the nine months ended September 30, 2020, the Company issued 570,475 shares of common stock for conversion of 10 shares of Series P Preferred stock. The Company recognized a loss on conversion of $4,026. As of September 30, 2020, there was an aggregate of 301 shares of Series P Preferred Stock issued and outstanding.

 

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Series Q

The Company has designated 2,000 shares of preferred stock as Series Q Preferred Stock. The Series Q Preferred Stock has a stated value of $1,000 per share, and entitles holders to receive cumulative dividends in cash at an annual rate of 12% of the stated value, payable quarterly within 60 days from the end of such fiscal quarter. The Series Q Preferred Stock has a liquidation preference equal to the stated value plus any accrued but unpaid dividends, in preference to the common stock. The Series Q Preferred Stock has no preemptive or subscription rights, and there is no sinking fund provision applicable to the Series Q Preferred Stock. The Series Q Preferred Stock does not have voting rights except as required by law. The Series Q Preferred Stock is convertible into common stock of the Company in an amount determined by dividing 200% of the stated value of the Series Q Preferred Stock being converted by the conversion price, provided that, the Series Q may not be converted into common stock to the extent such conversion would result in the holder beneficially owning more than 4.99% of the Company’s outstanding common stock. The conversion price will be equal to the average closing sale price of the common stock for the five trading days prior to the conversion date. The Company will have the right (but no obligation) to redeem the Series Q Preferred Stock at any time while the Series Q Preferred Stock are outstanding at a redemption price equal to the stated value plus any accrued but unpaid dividends. The cumulative dividends are recorded as interest expense. During the nine months ended September 30, 2020, the Company issued an aggregate of 1,188 shares of Series Q Preferred Stock in exchange for 1,188 shares of Series F Preferred Stock. As of September 30, 2020, there were 1,188 shares of Series Q Preferred Stock issued and outstanding. The Company accrued dividends in the amount of $7,181.

 

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.

   

September 30, 2020

The Company issued 9,732,328 shares of common stock for the settlement of convertible promissory notes in an aggregate principal in the amount of $114,612, plus interest in the amount of $37,494, and default settlement fees of $126,064, based upon conversion prices of $0.025 to $0.05.

 

The Company issued 3,297,275 shares of common stock for services at fair value of $263,997.

 

The Company issued 295,141 shares of common stock upon conversion of 6,000,000 shares of Series D-1 preferred stock 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 602,436 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 10,038,055 shares of common stock upon conversion of 284 shares of Series L preferred stock. The Company recognized a gain on the conversions of the shares in the amount of $29,188.

 

The Company issued 2,313,689 shares of common stock upon conversion of 70 shares of Series J preferred stock. The Company recognized a loss on the conversion of shares in the amount of $1,033.

 

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.

 

The Company issued 166,990 shares of common stock for the payment of dividends for the Series O preferred stock.

 

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The Company issued 570,475 shares of common stock upon conversion of 10 shares of Series P preferred stock. The Company recognized a loss on conversion in the amount of $4,026.

 

September 30, 2019

The Company issued 1,396,553 shares of common stock upon conversion of convertible promissory notes in an aggregate principal amount of $460,135, and a default settlement of $77,924, plus interest in the amount of $100,557, with an aggregate fair value loss on conversion of debt in the amount of $254,585, based upon conversion prices of $0.40 to $3.60.

 

The Company issued 744,333 shares of common stock for services at fair value of $623,141 at prices ranging from $0.40 to $0.60 per share.

The Company issued 82,799 shares of common stock in conjunction with the issuance of Series G preferred stock, through a private placement at par value.

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 September 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.

 

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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.

 

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 September 30, 2020, the Company recognized costs associated with the alternate vesting schedule in the amount of $11,534.

 

During the nine months ended September 30, 2020, per electing and qualifying for the Restricted Stock Grant Agreement alternate vesting schedule, the Company issued to Mr. Eckelberry an aggregate of 115,344 shares of common stock relating to his May 2016 Restricted Stock Grant Agreement.

 

Warrants

During the nine months ended September 30, 2020, no warrants were issued by the Company. A summary of the Company’s warrant activity and related information follows for the nine months ended September 30, 2020:

  

   September 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 September 30, 2020, the weighted average remaining contractual life of warrants outstanding:

 

    September 30, 2020 
            Weighted Average 
Exercisable   Warrants   Warrants   Remaining Contractual 
Prices   Outstanding   Exercisable   Life (years) 
$500.00    122,044    122,044    0.87 
      122,044    122,044      

 

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At September 30, 2020, the aggregate intrinsic value of the warrants outstanding was $0.

 

5. CONVERTIBLE PROMISSORY NOTES

 

As of September 30, 2020, the outstanding convertible promissory notes are summarized as follows:

 

Convertible Promissory Notes  $3,191,623 
Less current portion   1,000,619 
Total long-term liabilities  $2,191,004 

   

Maturities of long-term debt for the next three years are as follows:

 

Period Ending September 30,  Amount 
2021   1,000,619 
2022   2,128,729 
2023   62,275 
   $3,191,623 

 

At September 30, 2020, the Company had $3,191,623 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 maturity dates were extended from the date of each tranche through maturity dates ending on October 20, 2021 through April 30, 2022. 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 nine months ended September 30, 2020, the Company issued 3,795,332 shares of common stock, upon conversion of $66,750 in principal, plus accrued interest of $37,495. As of September 30, 2020, the 2014-2015 Notes had an aggregate remaining balance of $1,033,800, which is long term.

 

The unsecured convertible promissory notes (the “OID Notes”) had an aggregate remaining balance of $184,124, plus accrued interest of $13,334. The OID Notes included an original issue discount and one-time interest, which has been fully amortized. The OID Notes matured on December 31, 2017, which were extended to June 30, 2018. The OID Notes matured on June 30, 2018 and was extended to June 30, 2023. 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 nine months ended September 30, 2020, the Company issued 130,711 shares of common stock upon conversion of principal in the amount of $5,150. As of September 30, 2020, the remaining balance was $62,275, which is long term.  

  

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 matured on May 19, 2020 and were extended from the date of each tranche through maturity dates ending on March 1, 2022 through August 31, 2022. 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 September 30, 2020, the remaining balance of the 2015-2016 Notes was $1,200,000, which is long term.

 

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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 September 30, 2020, the remaining balance on the Dec 2015 Note was $167,048, which is short term.

 

The Company issued a convertible note (the “Sep 2016 Note”) in exchange for accounts payable in the amount of $430,896, which could be converted into shares of the Company’s common stock after September 15, 2016. The Sep 2016 Note was accounted for under ASC 470, whereby, a beneficial conversion feature was recorded at time of issuance. The Sep 2016 Note met the criteria of a derivative and was accounted for under ASC 815. The Sep 2016 Note has zero stated interest rate, and the conversion price shall be equal to 75% of the average three lowest last sale prices traded during the 25 trading days immediately prior to conversion. The Sep 2016 Note did not meet the criteria of a derivative at the date of the issuance, and was accounted for as a beneficial conversion feature, which was amortized over the life of the Sep 2016 Note and recognized as interest expense in the financial statements. The conversion feature of the Sep 2016 Note was considered a derivative in accordance with current accounting guidelines because of the reset conversion feature of the Sep 2016 Note. As of September 30, 2020, the remaining balance on the Sep 2016 Note was $430,896, which is short term.

 

The Company issued two (2) unsecured convertible promissory notes (the “Apr & May 2018 Notes”), in the aggregate amount of $300,000 on April 2, 2018 and May 31, 2018. The Apr & May 2018 Notes had maturity dates of April 2, 2019 and May 31, 2019, respectively. The Apr & May 2018 Notes bear interest at 10% per year. The Apr & May 2018 Notes may be converted into shares of the Company’s common stock at a variable conversion price of 50% of the lesser of the lowest trading price twenty-five (25) trading days prior to conversion. The conversion feature of the Apr & May 2018 Notes was considered a derivative in accordance with current accounting guidelines because of the reset conversion features of the Notes. During the nine months ended September 30, 2019, the Company issued 12,500 shares of common stock upon conversion of principal in the amount of $6,523, plus accrued interest of $4,727, with a fair value loss on conversion of $16,250. On March 13, 2019, the Company entered into a settlement agreement with the investor in the amount of $570,000, based on the outstanding balance due and payable under the Apr & May 2018 Notes. The Company set up a reserve of 2,630,769 shares of common stock of the Company for issuance upon conversion by the investor of the amounts owed under the Notes, in accordance with the terms of the Notes, including, but not limited to the beneficial ownership limitations contained in the Notes. In addition to the foregoing, upon the sale by the investor of the settlement shares as delivered to the investor by the Company, resulting in total net proceeds less than the settlement value, the investor is entitled to additional settlement shares of the Company’s common stock. If after the investor has sold all settlement shares, the investor delivers a written notice to the Company certifying that the investor is entitled to additional settlement shares of the Company’s common stock (the “Make-Whole Shares”). The number of make-whole shares being equal to the greater of ((i) zero and (ii) the quotient of (1) the difference of (x) the settlement value with respect to each sale of shares by the Investor after the delivery of the Settlement Shares, minus (y) the aggregate net consideration received by the Investor from the resale of all shares of common stock issued by the Company, divided by (2) the average trailing closing price for ten (10) trading days for the shares immediately preceding the date of delivery of the make-whole shares. During the nine months ended September 30, 2020, the Company issued 5,806,285 shares of common stock upon conversion of principal in the amount of $42,712, plus $126,064 default settlement fees. As of September 30, 2020, the remaining balance on the Apr & May 2018 Notes were $297,604, which is short term.  

 

During the nine months ended September 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.

 

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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 September 30, 2020 was $8,012,677.

 

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 nine months ended September 30, 2020 and 2019:

 

   Nine Months Ended 
   September 30, 
   2020   2019 
Equipment Contracts  $1,879,727   $1,830,217 
Component Sales   1,076,574    730,040 
Services Sales   108,457    116,176 
Licensing Fees        20,000 
   $3,064,758   $2,696,433 

  

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 nine months ended September 30, 2020 was $407 and for the year ending December 31, 2019 was $26,287. The contract liability for the nine months ended September 30, 2020 was $454,681 and for the year ending December 31, 2019 was $428,009.

  

7. FINANCIAL ASSETS

 

Convertible Note Receivable

The Company purchased a 10% convertible note in the amount of $80,000, through a private placement with Water Technologies International, Inc (“WTII”). The Note is convertible into common stock of WTII at a price of 65% of the lowest trading price for the ten (10) trading days immediately prior to the conversion date. The conversion price shall not be lower than a price of $0.0001 per share. As of September 30, 2020, the note included principal of $80,000 plus accrued interest of $49,880.  

 

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 September 30, 2020, the fair value of the preferred shares was $10,000.  

 

Restricted Asset

During the nine months ended September 30, 2020, the Company sold Series M Preferred stock, whereby, $5,100 of funds were held in escrow for the purchase of Series M Preferred Stock. As of September 30, 2020, an aggregate of $5,000 in Series M Preferred Stock had not yet been issued.

 

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8. LOANS PAYABLE

 

Secured Loans Payable

The Company entered into short term loans with various lenders for capital expansion secured by the Company’s assets in the amount of $1,749,970, which included finance cost of $624,810. The finance cost was fully amortized over the terms of the loans, which have various maturity dates ranging from October 2018 through February 2019. The term of the loans ranged from two months to six months. The net balance as of September 30, 2020 was $342,896.

 

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 $68,038, leaving a balance of $119,016 as of September 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.

 

9. CAPITAL LEASES

 

The Company entered into a capital lease for the purchase of equipment during the nine months ended September 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 September 30, 2020, the maturities are summarized as follows:

 

Capital lease  $19,345 
Less current portion   9,088 
Total long-term liabilities  $10,257 

  

Long term maturities for the next two years are as follows:

 

Period Ending September 30,
2021   9,088 
2022   1,169 
   $10,257 

 

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10. FOREIGN SUBSIDIARY

 

On December 31, 2014, the Company formed a wholly owned subsidiary, OriginClear Technologies Limited (OCT), in Hong Kong, China. The Company granted OCT a master license for the People’s Republic of China. In turn, OCT is expected to license regional joint ventures for water treatment.

 

11. COMMITMENTS AND CONTINGENCIES

 

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 nine months ending September 30, 2020.

  

Litigation

In February 2019, a Complaint was filed in the Superior Court for the State of California, for breach of contract, common law counts for sums due for services allegedly performed, and fraud. The Complaint was filed by RDI Financial, LLC (“RDI”), an alleged assignee of Interdependence, Inc., and named the Company and its developmental subsidiary, WaterChain, Inc., as Defendants. RDI claimed that its assignor, Interdependence, Inc., entered into a contract with the Defendants for Interdependence to provide reputation and professional relationship management services. RDI claimed that Interdependence provided the services and that the Company was required to make certain payments of cash and our capital stock to Interdependence, but did not do so. RDI 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, and the absence of prior notice, service of the suit and an improper default promptly challenged. In October 2019 the Court vacated the default and judgment, and granted the Company and WaterChain leave to file an Answer and Cross-Complaint against RDI and Interdependence. Through these filings, the Company and WaterChain, Inc. contest the allegations and claims in the Complaint, deny that Interdependence performed the required services, and contend that we overpaid Interdependence $40,000 for whatever limited work was done. More specifically, in November, 2019, an Answer was filed by the Company and WaterChain denying the claims in the Complaint, along with a Cross-Complaint alleging fraudulent inducement to enter into the contract, negligent misrepresentations, breach of contract, and to rescind the underlying contract. We have alleged that Interdependence misrepresented the nature and scope of the services which were to be provided and its ability to provide them, falsely promised and promoted the results would obtain for the Company and WaterChain in 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 limited work 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 continuing confidential settlement negotiations based upon a cost of continuing litigation analysis, but we can provide no assurance that any settlement will be reached nor can we provide any assurances regarding any terms of such settlement if again one is reached. Due to their confidential nature, we also cannot further comment on how the Company and WaterChain views the in progress negotiations or as to any proposed terms by either side, and can only state that they are in progress at this time. As of date of this report, legal fees and costs in this action have been substantial and it is impossible at this time to predict an exact amount, or even a meaningful estimate, of the aggregate sums that may be incurred in finally resolving or adjudicating this lawsuit.

 

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On September 21, 2020, the Company filed a complaint in the Supreme Court for the State of New York in and for the County of Boome against C6 Capital LLC (“C6 Capital”). The case stems from the purported “Purchase Agreement for the Sale of Receipts” that OriginClear and C6 Capital entered into on July 17, 2018 (the “C6 Agreement”). The Company is alleging that the C6 Agreement is, in fact, a loan, and not a merchant cash advance, and is in violation of New York’s usury laws, and requesting that the court declare the C6 Agreement void and unenforceable; that the judgment that was entered against the Company on November 7, 2018 in the amount of $64,337 be vacated; attorneys’ fees and costs; court costs and fees; and all other relief to which the Company may be entitled.

 

On September 22, 2020, the Company filed an Order to Show Cause seeking a Temporary Restraining Order and Preliminary Injunction. On September 23, 2020, the court granted the Company’s request for a Temporary Restraining Order, which remains in effect as of the date hereof. On October 30, 2020, the parties entered into a Stipulation, adjourning the hearing on Company’s Order to Show Cause until December 17, 2020.

 

12. SUBSEQUENT EVENTS

 

Management has evaluated subsequent events according to the requirements of ASC TOPIC 855 and has determined that there are the following subsequent events:

 

Between October 1, 2020 and November 17, 2020, per electing and qualifying for the Restricted Stock Grant Agreement alternate vesting schedule, the Company issued to Mr. T. Riggs Eckelberry, one employee and one contractor an aggregate of 1,065,779 shares of common stock relating to their Restricted Stock Grant Agreements. 

 

Between October 1, 2020 and November 19, 2020, the Company entered into subscription agreements with certain accredited investors pursuant to which the Company sold an aggregate of 425 shares of the Company’s Series O Preferred Stock for an aggregate purchase price of $425,000. The Company also issued an aggregate of 106 shares of its Series P Preferred Stock to the investors.

 

Between October 9, 2020, and November 18, 2020 holders of convertible promissory notes converted an aggregate principal and interest amount of $93,803 into an aggregate of 7,232,789 shares of the Company’s common stock. 

 

Between October 30, 2020 and November 17, 2020, the Company issued to consultants and one employee an aggregate of 1,258,572 shares of the Company’s common stock for services.

 

Between October 2, 2020 and November 17, 2020, holders of Series L Preferred Stock converted an aggregate of 44 Series L shares into an aggregate of 3,818,868 shares, including make-good shares, of the Company’s common stock.

 

Between October 20, 2020 and November 2, 2020, holders of Series P Preferred Stock converted an aggregate of 45 Series P shares into an aggregate of 1,817,995 shares, including make-good shares, of the Company’s common stock.

 

Between October 1, 2020 and October 21, 2020, the Company entered into agreements with certain holders of the Company’s Series F Preferred Stock, pursuant to which such holders exchanged an aggregate of 215 shares of Series F Preferred Stock for an aggregate of 90 shares of the Company’s Series Q Preferred Stock, and 125 shares of Series O Preferred Stock along with an aggregate of 31 shares of the Company’s Series P Preferred Stock.

 

Between October 1, 2020 and November 17, 2020, holders of Series Q Preferred Stock converted an aggregate of 53 Series Q shares into an aggregate of 3,140,140 shares of the Company’s common stock.

 

On November 16, 2020, the Company filed a certificate of designation of Series R Preferred Stock (the “Series R COD”) with the Secretary of State of Nevada. Pursuant to the Series R COD, the Company designated 5,000 shares of preferred stock as Series R. The Series R has a stated value of $1,000 per share, and will be entitled to cumulative dividends in cash at an annual rate of 10% of the stated value, payable quarterly within 60 days from the end of such fiscal quarter. The Series R Preferred Stock will not be entitled to any voting rights except as may be required by applicable law. The Series R Preferred Stock will be convertible into common stock of the Company in an amount determined by dividing 200% of the stated value of the Series R being converted by the conversion price; certain prior investors will also be entitled to certain make-good shares; provided that, the Series R may not be converted into common stock to the extent such conversion would result in the holder beneficially owning more than 4.99% of the Company’s outstanding common stock. The conversion price will be equal to the average closing sale price of the common stock for the five trading days prior to the conversion date. The Company will have the right (but no obligation) to redeem the Series R at any time while the Series R are outstanding at a redemption price equal to, if paid in cash, the stated value plus any accrued but unpaid cash dividends, or, if paid in shares of common stock, in an amount of shares determined by dividing the stated value being redeemed by the conversion price.

 

On November 18, 2020, the Company entered into subscription agreements with certain accredited investors pursuant to which the Company sold an aggregate of 200 shares of the Company’s Series R Preferred Stock for an aggregate purchase price of $200,000.

 

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ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

 

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

 

  business strategy;

 

  financial strategy;

 

  intellectual property;

 

  production;

 

  future operating results; and

 

  plans, objectives, expectations and intentions contained in this report that are not historical.

 

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

 

Organizational History

 

OriginClear, Inc. (“we”, “us”, “our”, the “Company” or “OriginClear”) was incorporated on June 1, 2007 under the laws of the State of Nevada. We have been engaged in business operations since June 2007. We moved into the commercialization phase of our business plan having previously been primarily involved in research, development and licensing activities. Our principal offices are located at 13575 58th Street North, Suite 200, Clearwater, FL 33760. Our main telephone number is (727) 440-4603. Our website address is www.OriginClear.com. In addition to announcing material financial information through our investor relations website, press releases, SEC filings and webcasts, we also intend to use the following social media channels as a means of disclosing information about our products, our planned financial and other announcements, our attendance at upcoming investor and industry conferences, and other matters and for complying with our disclosure obligations under Regulation FD:

 

  OriginClear’s Twitter Account (https://twitter.com/OriginClear)

 

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

 

  OriginClear’s LinkedIn Page (https://www.linkedin.com/company/2019598)

 

The information we post through these social media channels may be deemed material. Accordingly, investors should monitor these accounts, in addition to following the company’s press releases, SEC filings, public conference calls and webcasts. This list may be updated from time to time. 

 

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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. 

 

Overview of Business

 

Our mission is to provide expertise and technology to help make clean water available for all. Specifically, we have the following initiatives:

 

  1. We license our technology on a limited basis to treat heavily polluted waters and also to remove harmful micro-contaminants from drinking water, using minimal energy, chemicals, and materials.

 

  2. A versatile designer and builder of municipal, utility, commercial, industrial, agricultural and specialty water purification, treatment and conveyance systems based in Texas. This company, Progressive Water Treatment Inc. (PWT), which we acquired in 2015, just celebrated its 20th anniversary and has a solid industry reputation for quality and innovation. We have integrated our Modular Water Systems (MWS) division with PWT, adding a synergy of innovative patented prefabricated systems and a visionary chief engineer, Dan Early.

 

  3. Leveraging the expertise of PWT/MWS, we are building a network of customer-facing water brands to expand our global market presence and our technical expertise.

 

  4. We develop new business models, such as Water As A Career™ and WaterChain™, both of which are designed to help achieve funding for water treatment and management systems, and the entrepreneurs selling these. We have completed a Proof of Concept pilot program for Water As A Career and intend to expand it, as finances allow. WaterChain is in a research and development phase.
  5. We are expanding our network of activities internationally through our partnership with Philanthroinvestors Inc., and applying their successful real estate philanthropic investing practices to the water industry.

 

Water is our most valuable resource, and the mission of OriginClear is to improve the quality of water and help return it to its original and clear condition.

 

Technology Licensing Division

 

For its first eight years of operations, OriginClear focused on development and commercialization of its Electro Water Separation™ technology. In 2015, the technology went into commercial phase and is available on a limited basis through integrator partners such as Spain’s Depuporc. On January 22, 2020, the Company named India’s Permionics as its Strategic Partner for Asia-Pacific Region to better address regional opportunities. Permionics is also a key channel partner for PWT. The Company believes this is a more productive way to access the region, and it is in the process of closing OriginClear (HK); OriginClear continues to manage China opportunities from the United States.

   

The Technology

 

OriginClear is the developer of EWS, the high-speed, primarily chemical-free technology to clean up large quantities of water. It removes oils, suspended solids, certain dissolved solids, and pathogens, in a continuous and energy-efficient process. The Company originally developed this technology to solve the challenge of removing microalgae from a highly dilute state. We believe EWS technology remains the most efficient non-chemical, continuous mechanism for the concentration of live algae cells from water.

 

The electro-chemical process was then extended, first to cleaning up oil and gas waste water and most recently, to industrial, agricultural and urban effluents. These water treatment applications are entirely electrochemical in nature and do not rely on algae for its cleaning capabilities, which is a separate application of the technology. EWS is designed to be an early step in removal of oils, solids and pathogens; reducing the work that more expensive, downstream processes such as Ultra Filtration or Reverse Osmosis must do, therefore enabling more cost-efficient and high-volume water cleanup overall.

  

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In March of 2016, OriginClear announced that it had successfully developed and proved Advanced Oxidation for its breakthrough water cleanup system, EWS. University laboratory tests have shown that EWS with Advanced Oxidation (EWS:AOx™) can now extract dissolved contaminants, which are otherwise difficult to remove without chemicals such as chlorine. Overall, the system has shown a dramatic reduction in Total Organic Compounds which includes all forms of organic contamination, solids, miscible or dissolved, to meet new stringent global discharge requirements.

 

Today, we are capable of pairing the two technologies as EWS:AOx™, or separately, as the application requires. OriginClear believes that its technology is valuable to the industry because it has the potential to greatly extend the life of membranes and filters by effectively treating very dirty, oily water, while reducing chemical use significantly.

 

OriginClear also believes that its Advanced Oxidation technology will help neutralize harmful micro-contaminants, such as industrial solvents, which is difficult or impossible to achieve with other technologies.

 

Overall, the system has shown a dramatic reduction in Total Organic Compounds which includes all forms of organic contamination, solids, miscible or dissolved, to meet new stringent global discharge requirements.

 

Technology Division Milestones

 

On December 5, 2019, OriginClear announced that its Spanish partner Depuporc unveiled an integrated manure treatment system using OriginClear technology. The demonstration system processes 30 metric tons per day, with client-validated reduction of contaminants.

 

On January 22, 2020, OriginClear named India’s Permionics as Strategic Partner for Asia-Pacific Region in an expansion of the existing licensing partnership intended to better address regional opportunities. Permionics is also a key channel partner for PWT.

 

On June 25, 2020, the Company announced it has entered into an Agency Agreement with AlMansoori Specialized Engineering (MSE), a unit of AlMansoori Group. MSE is the leading provider of oilfield services in the Middle East. Founded in 1977, the company has grown to a skilled workforce of over 3,000 across 24 countries throughout the region.

 

The alliance is intended to capitalize on efforts by the Company’s licensee in Oman, Special Oilfield Services, with which MSE has a joint venture, so that achievements in Oman can be expanded throughout the region.

 

OriginClear Group™

 

Outsourcing is a fast-growing reality in water treatment. Tougher regulations, water scarcities and general outsourcing trends are driving industrial and agricultural water treatment users to delegate their water problem to service providers. As Global Water Intelligence pointed out in their report on October 30, 2015, “Water is often perceived as a secondary importance, with end-users increasingly wanting to focus solely on their own core business. This is driving a move away from internal water personnel towards external service experts to take control of water aspects.” External service experts are typically small–privately owned and locally operated. Consolidating these companies, and creating new players where appropriate, could lead to enormous economies of scale through sharing of best practices, technologies, and customers.

 

OriginClear seeks to incubate or acquire businesses that help industrial water users treat their water themselves, and often reuse it. We believe that building a group of such water treatment and water management businesses is an opportunity for significant growth and increased Company value for the stockholders.

   

The Company cautions that suitable acquisition candidates may not be identified and even if identified, the Company may not have adequate capital to complete the acquisition and/or definitive agreement may not be reached. Internally-incubated businesses are an ongoing laboratory, and similarly, may not become commercial successes.

 

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Group Development Milestones

 

Water As A Career™

 

On March 12, 2020, the Company first discussed investor-financed water systems (www.originclear.com/ceo/water-management-increasing-real-estate-value). The concept became a new lab incubation, Investor Water, first outlined in detail on April 9, 2020 (www.originclear.com/ceo/regulation-a-takes-off).

 

The first field pilot of the experimental program, a pool-cleaning system rental application, was internally funded by the Company, and it is the Company’s intention to continue to develop water equipment career programs using its own resources, under the Water As A Career (WAAC) brand.

 

The Company intends to develop the Investor Water marketplace concept to connect investors with secured water projects at some stage in the future. The Company may modify or abandon this program at any time.

 

Daniel M. Early/Modular Water Systems™

 

On June 22, 2018, OriginClear signed an exclusive worldwide licensing agreement with Daniel “Dan” Early for his proprietary technology for prefabricated water transport and treatment systems. On July 19, 2018, the Company began incubating its Modular Water Treatment product line (MWS) around Mr. Early’s technology and perspective customers. The Company has funded the development of this product line with internal cash flow. In Q1 of 2020, the Company fully integrated MWS with wholly-owned Progressive Water Treatment Inc. On June 4, 2020, the Company named Daniel Early as Corporate Chief Engineer. One of Early’s key roles will be to provide technology oversight for early stage ventures such as Investor Water.

 

As disclosed in its annual report, the Company agreed to renew its 2018 license with inventor Daniel M. Early for an additional ten years, for the five patents covering packaged water treatment systems built into containers. We also gained the right to sublicense, and, with Mr. Early’s approval, to create ISO-compliant manufacturing joint ventures. Mr. Early has been named the Chief Engineer of the Company.

 

Water Technologies International

 

On May 17, 2018, in concert with a purchase of a minority stake in the firm, the Company entered into a licensing agreement with Water Technologies International, Inc. (OTC: WTII), which commercializes the innovative SIMPOD portable waste water treatment plant, and has developed a line of atmospheric water generators. The licensing agreement gave Water Technologies access to OriginClear’s patented electrochemical treatment process, Electro Water Separation with Advanced Oxidation™ (EWS:AOx™), and support to enter the oil and gas and other markets. The Technical Assistance Program fee, another part of OriginClear’s licensing agreement, was paid to OCLN in WTII preferred shares. The license also calls for standard royalty payments to OriginClear. OCLN has retained these shares, while the two organizations are not actively collaborating today.

 

WaterChain, Inc.

 

WaterChain, Inc. was incorporated in December 2017 and is today a research and development project of the Company.

 

Progressive Water Treatment Inc.

 

On October 1, 2015, the Company completed its acquisition of Dallas-based Progressive Water Treatment Inc. (“PWT”), a designer, builder and service provider for a wide range of industrial water treatment applications.

 

With the PWT and future potential acquisitions, the creation of the Modular Water Systems product line as an integral part of PWT, and integrating its core technology, OriginClear aims to offer a complementary, end-to-end offering to serve growing corporate demand for outsourced water treatment.

  

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PWT’s Business

 

Since 1995, PWT has been designing and manufacturing a complete line of water treatment systems for municipal, industrial and pure water applications. PWT designs and manufactures a complete line of water treatment systems for municipal, industrial and pure water applications. Its uniqueness is its ability to gain an in-depth understanding of customer’s needs and then to design and build an integrated water treatment system using multiple technologies to provide a complete, not partial solution.

   

To help address customer needs, PWT utilizes a wide range of technologies, including chemical injection, media filters, membrane, ion exchange and SCADA (supervisory control and data acquisition) technology in turnkey systems. The Company also offers a broad range of services including maintenance contracts, retrofits and replacement assistance. In addition, PWT rents equipment in contracts of varying duration. Customers are primarily served in the United States and Canada, with the company’s reach extending worldwide from Siberia to Argentina to the Middle East.

 

PWT is also a certified manufacturer of products using OriginClear’s Electro Water Separation™ and Advanced Oxidation (AOx™) technologies, building these on behalf of OriginClear licensees.

 

PWT Milestones 

 

In the first quarter of 2019, the Company increased the number of the manufacturer’s representatives for its operating units, PWT and Modular Water Systems (“MWS”).

 

On Nov 7, 2019, OriginClear published a case study showing how its Modular Water System may help automotive dealership expand into rural land. The case study shows how point-of-use treatment solves lack of access to the public sewer system.

 

On March 5, 2020, OriginClear announced disruptive pump and lift station pricing, stating that its prefabricated modules with a lifespan of up to 100 years now compete with precast concrete.

 

Modular Water Systems

 

On July 19, 2018, the Company announced the launch of its Modular Water Treatment product line, offering a unique product line of prefabricated water transport and treatment systems. Daniel “Dan” Early P.E. (Professional Engineer) heads the project and along with the intellectual property, which the Company licensed exclusively worldwide for three years (since renewed for ten years beginning in 2020, with sublicensing rights), brought a following of prospective customers. On July 25, 2018, MWS received its first order, for a brewery wastewater treatment plant.

 

With PWT and other companies as fabricators and assemblers, MWS designs, manufactures and delivers prefabricated water transport (pump stations) and wastewater treatment plant (“WWTP”) products to customers and end-users that have to clean their own wastewater. It uses Structurally Reinforced Thermoplastic (“SRTP”) materials to focus on patented developing water and wastewater collection, conveyance, and treatment systems that have high performance and sustainability. Typical customers may include schools, small communities, institutional facilities, real estate developments, factories, and industrial parks. Dan Early has pioneered the use of heavy reinforced plastic materials to create modular “water-systems-in-a-box”. Not only is reinforced thermoplastic faster and cheaper to build, but it can have three times the lifespan, or more, compared with concrete-and-steel construction. Mr. Early’s inventions have led to the patented Wastewater System & Method and four other patents, which OriginClear has licensed exclusively for the world.

 

Dan Early has been designing and building prepackaged pump stations and municipal wastewater treatment systems for over five years, with a career background of more than two decades of water engineering experience.

 

MWS designs, manufactures and implements advanced prepackaged wastewater treatment, pump stations and custom systems with primary focus on decentralized opportunities away from the very competitive large municipal wastewater treatment plants. These decentralized opportunities include: rural communities, housing developments, industrial sites, schools and many more. 

 

Today, MWS is fully integrated with PWT in Texas, and Mr. Early is the Company’s Chief Engineer.

 

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Patents

 

On June 25, 2018, Daniel Early granted the Company a worldwide, exclusive non-transferable license to intellectual property consisting of five issued US patents, and design software, CAD, marketing, design and specification documents (“Early IP”).

 

On May 20, 2020, we agreed on a renewal of the license for an additional ten years, with three-year extensions. We also gained the right to sublicense, and, with approval, to create ISO-compliant manufacturing joint ventures. All royalties surviving the 2018 license were settled.

 

We may contract with distribution channels (equipment distributors, oil service companies, water treatment companies, system integrators and engineering companies) of our choice to act on our behalf for the purpose of selling and integrating the Early IP.

 

The Early IP consists of combined protection on the materials and configurations of complete packaged water treatment systems, built into containers. The parents consist of the following:

 

#   Description   Patent No.   Date Patent
Issued
  Expiration
Date
1   Wastewater System & Method   US 8,372,274 B2
Applications: WIPO, Mexico
  02/12/13   07/16/31
2   Steel Reinforced HDPE Rainwater Harvesting   US 8,561,633 B2   10/22/13   05/16/32
3   Wastewater Treatment System CIP   US 8,871,089 B2   10/28/14   05/07/32
4   Scum Removal System for Liquids   US 9,205,353 B2   12/08/15   02/19/34
5   Portable, Steel Reinforced HDPE Pump Station CIP   US 9,217,244 B2   12/22/15   10/20/31

  

With the rising need for local, point-of-use or point-of-discharge water treatment solutions, the Modular Water Systems licensed IP family is the core to a portable, integrated, transportable, plug-and-play system that, unlike other packaged solutions, can be manufactured in series, have a longer life and are more respectful of the environment.

 

The common feature of this IP family is the use of a construction material (SRTP), for the containers that is:

 

  more durable: an estimated 75 to 100-year life cycle as opposed to a few decades for metal, or 40 to 50 years maximum for concrete;

 

  easier to manufacture: vessels manufacturing process can be automated; and

 

  recyclable and can be made out of biomaterials 

 

In addition, patents US 8,372,274 and US 8,871,089 (1 and 3) relate to the use of vessels or containers made out of this material combined with a configuration of functional modules, or process, for general water treatment.

 

Other subsequent patents, while keeping the original claims and therefore making them stronger, focus on more targeted applications. These patents outline a given combination of modules engineered inside the vessel to address a specific water treatment challenge.   

 

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Expansion of the PWT and MWS Business-Lines

 

Beginning with its first installation, PWT built MWS components. PWT and MWS are now fully integrated as a single profit and manufacturing center. 

 

In April 2019, we completed the expansion of our manufacturer’s representative network to serve both PWT and MWS for customer lead generation. 

 

On June 1, 2020, the Company reported sales stable amid COVID-19 recovery, and that it has dedicated the duties of Chief Operating Officer Tom Marchesello, to seeking to increase revenues from existing profit centers of PWT and MWS at its Texas headquarters.

 

On June 4, 2020, the Company announced it named Daniel Early as Corporate Chief Engineer, the two-year integration process of Early’s modular patents now considered complete. In this capacity, Early oversees and supports PWT and MWS, in addition to the creation of corporate brands and supporting the Investor Water startup technically.

 

Critical Accounting Policies

 

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

  

Revenue Recognition

 

We recognize revenue when services are performed, and at the time of shipment of products, provided that evidence of an arrangement exists, title and risk of loss have passed to the customer, fees are fixed or determinable, and collection of the related receivable is reasonably assured.

 

Revenues and related costs on construction contracts are recognized as the performance obligations for work are satisfied over time in accordance with Accounting Standards Codification (“ASC”) 606, Revenue from Contracts with Customers. Under ASC 606, revenue and associated profit, will be recognized as the customer obtains control of the goods and services promised in the contract (i.e., performance obligations). All un-allocable indirect costs and corporate general and administrative costs are charged to the periods as incurred. However, in the event a loss on a contract is foreseen, the Company will recognize the loss, as it is determined. Revisions in cost and profit estimates during the course of the contract are reflected in the accounting period in which the facts for the revisions become known. Provisions for estimated losses on uncompleted contracts are made in the period in which such losses are determined. Changes in job performance, job conditions, and estimated profitability, including those arising from contract penalty provisions, and final contract settlements, may result in revisions to costs and income, which are recognized in the period the revisions are determined.

 

Use of Estimates

 

The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities, disclosure of contingent assets and liabilities at the date of the financial statements, and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. Significant estimates include estimates used to review the Company’s goodwill, impairments and estimations of long-lived assets, revenue recognition on percentage of completion type contracts, allowances for uncollectible accounts, inventory valuation, valuations of non-cash capital stock issuances and the valuation allowance on deferred tax assets. The Company bases its estimates on historical experience and on various other assumptions that are believed to be reasonable in the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. Actual results may differ from these estimates under different assumptions or conditions.  

 

Fair Value of Financial Instruments

 

Fair value of financial instruments requires disclosure of the fair value information, whether or not recognized in the balance sheet, where it is practicable to estimate that value. As of September 30, 2020, the amounts reported for cash, prepaid expenses, accounts payable and accrued expenses approximate the fair value because of their short maturities.

 

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Recently Issued Accounting Pronouncements

 

Management reviewed currently issued pronouncements during the three months ended September 30, 2020, and does not believe that any recently issued, but not yet effective, accounting standards if currently adopted would have a material effect on the accompanying condensed financial statements.

  

Results of Operations for the three months ended September 30, 2020 compared to the three months ended September 30, 2019.

 

Revenue and Cost of Sales

 

For the three months ended September 30, 2020, we had revenue of $917,320 compared to $939,468 for the three months ended September 30, 2019. Cost of sales for the three months ended September 30, 2020 was $934,708 compared to $858,828 for the three months ended September 30, 2019. Revenue decreased primarily due to our subsidiary’s decrease in revenue, due to focusing on marketing of its products.

 

Our gross (loss) profit was $(17,388) and $80,640 for the three months ended September 30, 2020 and 2019, respectively. 

   

Selling and Marketing Expenses

 

For the three months ended September 30, 2020, we had selling and marketing expenses of $339,759, compared to $409,825 for the three months ended September 30, 2019. The decrease was primarily due to a decrease in marketing expense.

 

General and Administrative Expenses

 

General and administrative expenses were $782,810 for the three months ended September 30, 2020, compared to $595,181 for the three months ended September 30, 2019.  The increase was primarily due to an increase in legal fees.

 

Research and Development Cost

 

Research and development cost were $29,334 for the three months ended September 30, 2020 compared to $29,334 for the three months ended September 30, 2019.

 

Depreciation and amortization expense

 

Depreciation and amortization expense were $14,431 for the three months ended September 30, 2020 compared to $10,955 for the three months ended September 30, 2019.

 

Other Income and (Expenses)

 

Other income and (expenses) for the three months ended September 30, 2020 and 2019, were $6,201,888 and $(256,220), respectively. The increase in other income of $6,458,108 was primarily the result of an increase in non-cash accounts associated with the fair value of the derivatives in the amount of $6,584,547, an increase in gain on conversion of preferred stock in the amount of $18,066, an increase in interest expense of $152,505, with a decrease in unrealized loss on investment securities in the amount of $8,000. 

 

Net Income/(Loss)

 

Our net income (loss) for the three months ended September 30, 2020 and 2019, were $5,018,166 and $(1,220,875), respectively. The increase in net income of $6,239,041 was primarily the result of a decrease in other expenses associated with the net change in derivative instruments estimated each period. These estimates are based on multiple inputs, including the market price of our stock, interest rates, our stock price, volatility, variable conversion prices based on market prices defined in the respective agreements and probabilities of certain outcomes based on management’s estimates. These inputs are subject to significant changes from period to period, therefore, the estimated fair value of the derivative liabilities will fluctuate from period to period, and the fluctuation may be material.

 

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Results of Operations for the nine months ended September 30, 2020 compared to the nine months ended September 30, 2019.

 

Revenue and Cost of Sales

 

For the nine months ended September 30, 2020, we had revenue of $3,064,758 compared to $2,696,433 for the nine months ended September 30, 2019. The cost of sales for the nine months ended September 30, 2020 was $2,716,582 compared to $2,406,139 for the nine months ended September 30, 2019. Revenue and cost of sales increased primarily due to our subsidiary’s increase in revenue.

 

Our gross profit was $348,176 and $290,294 for the nine months ended September 30, 2020 and 2019, respectively. 

 

Selling and Marketing Expenses

 

For the nine months ended September 30, 2020, we had selling and marketing expenses of $1,053,559, compared to $1,247,332 for the nine months ended September 30, 2019. The decrease was primarily due to a decrease in investor relations and marketing expense.

 

General and Administrative Expenses

 

General and administrative expenses were $1,853,760 for the nine months ended September 30, 2020, compared to $1,766,496 for the nine months ended September 30, 2019. The increase was primarily due to an increase in non-cash outside services expense.

 

Research and Development Cost

 

Research and development cost for the nine months ended September 30, 2020 and 2019, were $83,400 and $80,094, respectively. The increase was primarily due to an increase in other research and development costs.    

 

Depreciation and amortization expense

 

Depreciation and amortization expense were $39,892 for the three months ended September 30, 2020 compared to $32,788 for the three months ended September 30, 2019.

 

Other Income and (Expenses)

 

Other income and (expenses) for the nine months ended September 30, 2020 and 2019, were $23,026,766 and $(5,481,624), respectively. The increase in other income of $28,508,390 was primarily the result of an increase in non-cash accounts associated with the fair value of the derivatives in the amount of $28,705,886, an increase in interest expense of $214,366, an increase in gain on conversion of preferred stock of $24,129, with a decrease in unrealized loss on investment securities of $9,200, and a decrease in other income of $16,459.

 

Net Income/(Loss)

 

Our net income (loss) for the nine months ended September 30, 2020 and 2019, were $20,344,331 and $(8,318,040), respectively. The increase in net income of $28,662,371 was primarily the result of a decrease in other expenses associated with the net change in derivative instruments estimated each period. These estimates are based on multiple inputs, including the market price of our stock, interest rates, our stock price, volatility, variable conversion prices based on market prices defined in the respective agreements and probabilities of certain outcomes based on managements’ estimates. These inputs are subject to significant changes from period to period, therefore, the estimated fair value of the derivative liabilities will fluctuate from period to period, and the fluctuation may be material. 

 

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Liquidity and Capital Resources

 

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

 

The condensed consolidated financial statements have been prepared on a going concern basis of accounting, which contemplates continuity of operations, realization of assets and liabilities and commitments in the normal course of business. The accompanying condensed consolidated financial statements do not reflect any adjustments that might result if the Company is unable to continue as a going concern. The Company has not generated significant revenue, and has negative cash flows from operations, which raise substantial doubt about the Company’s ability to continue as a going concern. The ability of the Company to continue as a going concern and appropriateness of using the going concern basis is dependent upon, among other things, raising additional capital and increasing sales. 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.

 

At September 30, 2020 and December 31, 2019, we had cash of $757,945 and $490,614, respectively, and a working capital deficit of $12,535,889 and $38,598,414, respectively.  The decrease in working capital deficit was due primarily to a decrease in contract receivable, contract assets, other receivable, prepaid expenses, loans payable, non-cash derivative liabilities and convertible notes, inventory, contracts liabilities and loans payable, with an increase in accounts payable, accrued expenses, and contract liabilities.

  

During the first nine months of 2020, we raised an aggregate of $2,449,918 from issuance of preferred stock. Our ability to continue as a going concern is dependent upon raising capital from financing transactions and future revenue.

 

Net cash used in operating activities was $2,636,761 for the nine months ended September 30, 2020, compared to $2,435,617 for the prior period ended September 30, 2019. The increase in cash used in operating activities was primarily due to an increase in professional fees and marketing expense.

 

Net cash flows used in investing activities for the nine months ended September 30, 2020 and 2019, were $9,386 and $33,924, respectively. The decrease in cash used in investing activities was primarily due to a decrease in the purchase of fixed assets and non-cash increase in change in fair value of investment.

 

Net cash flows provided by financing activities was $2,913,478 for the nine months ended September 30, 2020, as compared to $2,374,323 for the nine months ended September 30, 2019. The increase in cash provided by financing activities was due primarily to an increase in loan payable and cumulative dividends payable, with a decrease in proceeds for issuance of preferred and common stock. To date we have principally financed our operations through the sale of our common and preferred stock and the issuance of debt.

 

We do not have any material commitments for capital expenditures during the next twelve months. Although our proceeds from the issuance of preferred stock together with revenue from operations are currently sufficient to fund our operating expenses in the near future, we will need to raise additional funds in the future so that we can expand our operations. Therefore, our future operations are dependent on our ability to secure additional financing. Financing transactions may include the issuance of equity or debt securities, obtaining credit facilities, or other financing mechanisms. Additional capital may not be available on acceptable terms or at all. Furthermore, if we issue additional equity or debt securities, stockholders may experience additional dilution or the new equity securities may have rights, preferences or privileges senior to those of existing holders of our common stock. The inability to obtain additional capital may restrict our ability to grow and may reduce our ability to continue to conduct business operations. If we are unable to obtain additional financing, we may have to curtail our marketing and development plans and possibly cease our operations.

  

We have estimated our current average burn, and believe that we have assets to ensure that we can function without liquidation for a limited time, due to our cash on hand, growing revenue, and our ability to raise money from our investor base. Based on the aforesaid, we believe we have the ability to continue our operations for the immediate future and will be able to realize assets and discharge liabilities in the normal course of operations. However, there cannot be any assurance that any of the aforementioned assumptions will come to fruition and as such we may only be able to function for a short time.

  

Off-Balance Sheet Arrangements

 

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

   

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ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

 

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

 

ITEM 4. CONTROLS AND PROCEDURES  

 

Evaluation of Disclosure Controls and Procedures

 

Pursuant to Rules 13a-15(b) and 15-d-15(b) under the Exchange Act, the Company carried out an evaluation, under the supervision and with the participation of the Company’s management, including the principal executive officer and principal financial officer of the effectiveness of the design and operation of our 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.

 

Based on that evaluation and due to the lack of segregation of duties due to small Company staff size, our principal executive officer and principal financial officer concluded that our disclosure controls and procedures were ineffective as of the end of the period covered by this report. To address the deficiency, we performed additional analysis and other post-closing procedures in an effort to ensure our consolidated financial statements included in this quarterly report have been prepared in accordance with generally accepted accounting principles. Accordingly, management believes that the financial statements included in this report fairly present in all material respects our financial condition, results of operations and cash flows for the periods presented.

 

Changes in Internal Control Over Financial Reporting

 

There were no changes in the Company’s internal control over financial reporting (as defined in Rule 13a-15f of the Exchange Act) that occurred during the fiscal quarter ended September 30, 2020 that has materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

 

Limitations on Internal Controls

 

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

 

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PART II

 

Item 1. Legal Proceedings.

 

In February 2019, a Complaint was filed in the Superior Court for the State of California, for breach of contract, common law counts for sums due for services allegedly performed, and fraud. The Complaint was filed by RDI Financial, LLC (“RDI”), an alleged assignee of Interdependence, Inc., and named the Company and its developmental subsidiary, WaterChain, Inc., as Defendants. RDI claimed that its assignor, Interdependence, Inc., entered into a contract with the Defendants for Interdependence to provide reputation and professional relationship management services. RDI claimed that Interdependence provided the services and that the Company was required to make certain payments of cash and our capital stock to Interdependence, but did not do so. RDI 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, and the absence of prior notice, service of the suit and an improper default promptly challenged. In October 2019 the Court vacated the default and judgment, and granted the Company and WaterChain leave to file an Answer and Cross-Complaint against RDI and Interdependence. Through these filings, the Company and WaterChain, Inc. contest the allegations and claims in the Complaint, deny that Interdependence performed the required services, and contend that we overpaid Interdependence $40,000 for whatever limited work was done. More specifically, in November, 2019, an Answer was filed by the Company and WaterChain denying the claims in the Complaint, along with a Cross-Complaint alleging fraudulent inducement to enter into the contract, negligent misrepresentations, breach of contract, and to rescind the underlying contract. We have alleged that Interdependence misrepresented the nature and scope of the services which were to be provided and its ability to provide them, falsely promised and promoted the results would obtain for the Company and WaterChain in 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 limited work 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 continuing confidential settlement negotiations based upon a cost of continuing litigation analysis, but we can provide no assurance that any settlement will be reached nor can we provide any assurances regarding any terms of such settlement if again one is reached. Due to their confidential nature, we also cannot further comment on how the Company and WaterChain views the in progress negotiations or as to any proposed terms by either side, and can only state that they are in progress at this time. As of date of this report, legal fees and costs in this action have been substantial and it is impossible at this time to predict an exact amount, or even a meaningful estimate, of the aggregate sums that may be incurred in finally resolving or adjudicating this lawsuit.

 

On September 21, 2020, the Company filed a complaint in the Supreme Court for the State of New York in and for the County of Boome against C6 Capital LLC (“C6 Capital”). The case stems from the purported “Purchase Agreement for the Sale of Receipts” that OriginClear and C6 Capital entered into on July 17, 2018 (the “C6 Agreement”). The Company is alleging that the C6 Agreement is, in fact, a loan, and not a merchant cash advance, and is in violation of New York’s usury laws, and requesting that the court declare the C6 Agreement void and unenforceable; that the judgment that was entered against the Company on November 7, 2018 in the amount of $64,337 be vacated; attorneys’ fees and costs; court costs and fees; and all other relief to which the Company may be entitled.

 

On September 22, 2020, the Company filed an Order to Show Cause seeking a Temporary Restraining Order and Preliminary Injunction. On September 23, 2020, the court granted the Company’s request for a Temporary Restraining Order, which remains in effect as of the date hereof. On October 30, 2020, the parties entered into a Stipulation, adjourning the hearing on Company’s Order to Show Cause until December 17, 2020.

 

On October 12, 2020, the Company filed a complaint in the Supreme Court for the State of New York in and for the County of Ontario against GTR Source (“GTR”). The case stems from the purported merchant agreements that OriginClear and GTR entered into on July 20, 2018 and August 28, 2018 (together, the “GTR Agreements”). The Company is alleging that the GTR Agreements are, in fact, loans, and not merchant cash advances, and are in violation of New York’s usury laws, and requesting that the Court declare the GTR Agreements void and unenforceable; that the judgment that was entered against the Company on March 20, 2019 in the amount of $143,083 be vacated; that the Settlement Agreement entered into by and between OriginClear and GTR, dated December 13, 2018, be declared void and unenforceable; restitution of the excess, unlawful interest paid in the amount of $149,751; attorneys’ fees and costs; court costs and fees; and all other relief to which the Company may be entitled.

 

On October 16, 2020, the Company filed an Order to Show Cause seeking a Temporary Restraining Order and Preliminary Injunction. On October 23, 2020, the court granted the Company’s request for a Temporary Restraining Order, which remains in effect as of the date hereof. Also on October 23, 2020, the parties agreed, and the court ordered, that the action be stayed until November 23, 2020.


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On November 6, 2020, the Company filed a Motion to Vacate an Order and for Temporary Restraining Order and Preliminary Injunction in an action entitled Auctus Fund, LLC v. OriginClear, Inc., currently pending in the United States District Court for the District of Massachusetts. The Company contends that the District Court should vacate an Order compelling the Company to cooperate with Auctus and its efforts to convert the remaining amount due under certain settlement agreement dated March 13, 2019 into shares of the Company’s common stock. As of the date hereof, approximately $240,000 purportedly remains outstanding and owed to Auctus. In support of the relief being sought, the Company is alleging that Auctus qualifies as a “dealer”, under the definition set forth in Section 15(a) of the Securities Exchange Act of 1934, and, pursuant to Section 29(b) of the Exchange Act, the contracts underlying the transaction should all be declared void because Auctus is in violation of the Exchange Act by failing to register as a dealer with the U.S. Securities and Exchange Commission and an affiliate self-regulatory organization.

 

On November 16, 2020, the Company’s wholly-owned subsidiary, Progressive Water Treatment, Inc. (“PWT”) filed a complaint in the Supreme Court for the State of New York in and for the County of Erie against Yellowstone Capital LLC (“Yellowstone”). The case stems from a purported secured merchant agreement by and between PWT and Yellowstone, dated July 19, 2019 (the “Yellowstone Agreement”). PWT is alleging that the Yellowstone Agreement is, in fact, a loan, and not merchant cash advance, and is in violation of New York’s usury laws, and requesting that the Court declare the Yellowstone Agreement void and unenforceable; that the judgment that was entered against PWT and the Company on November 7, 2018 in the amount of $99,303 be vacated; that the Security Agreement and Guaranty, dated July 19, 2019, be declared void and unenforceable; that the Settlement Agreement entered into by and between PWT and Yellowstone, dated October 16, 2019, be declared void and unenforceable; payment of restitution, consisting of any and all excess, unlawful interest paid to Yellowstone, in the amount of $26,298; attorneys’ fees and costs; court costs and fees; and all other relief to which PWT may be entitled.

  

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.

 

During the three months ended September 30, 2020, the Company issued and sold an aggregate of 1,140 shares of Series O Preferred Stock and 285 shares of Series P Preferred Stock to accredited investors for an aggregate purchase price of $1,140,000.

 

In connection with the foregoing, the Company relied upon the exemption from registration provided by Section 4(a)(2) under the Securities Act of 1933, as amended, for transactions not involving a public offering.

  

Item 3. Defaults Upon Senior Securities.

 

As of the date of the filing of this report, the Company has 175 shares of Series F Preferred Stock outstanding which the Company was required to, and failed to redeem on September 1, 2020, for an aggregate redemption price (equal to the stated value) of $175,000.

 

Item 4. Mine Safety Disclosures

 

Not applicable.

 

Item 5. Other Information.

 

Not applicable.

 

Item 6.  Exhibits.

 

Exhibit
Number
  Description of Exhibit
 
3.1   Certificate of Designation of Series R Preferred Stock *
31   Certification by Chief Executive Officer and Chief Financial Officer, required by Rule 13a-14(a) or Rule 15d-14(a) of the Exchange Act.*
32   Certification pursuant to 18 U.S.C. §1350 as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.**
101.INS   XBRL Instance Document.*
101.SCH   XBRL Taxonomy Extension Schema.*
101.CAL   XBRL Taxonomy Extension Calculation Linkbase.*
101.DEF   XBRL Taxonomy Extension Definition Linkbase.*
101.LAB   XBRL Taxonomy Extension Label Linkbase.*
101.PRE   XBRL Extension Presentation Linkbase.*

 

* Filed herewith.

** Furnished herewith.

 

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SIGNATURES

 

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

 

November 23, 2020 ORIGINCLEAR, INC.
   
  /s/ T. Riggs Eckelberry 
  T. Riggs Eckelberry
  Chief Executive Officer
  (Principal Executive Officer) and
  Acting Chief Financial Officer
  (Principal Accounting and Financial Officer)

 

 

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