The accompanying unaudited financial statements of OriginOil, Inc. (the “Company”) have been prepared in accordance with accounting principles generally accepted in the United States of America for interim financial information and with the instructions to Form 10-Q and Rule 10-01 of Regulation S-X. Accordingly, they do not include all of the information and footnotes required by generally accepted accounting principles for complete financial statements. In the opinion of management, all normal recurring adjustments considered necessary for a fair presentation have been included. Operating results for the three months ended March 31, 2013 are not necessarily indicative of the results that may be expected for the year ending December 31, 2013. 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, 2012.
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. The Company does not generate significant revenue, and has negative cash flows from operations, which raise substantial doubt about the Company’s ability to continue as a going concern. The ability of the Company to continue as a going concern and appropriateness of using the going concern basis is dependent upon, among other things, additional cash infusion. The Company has obtained funds from its shareholders in the three months ended March 31, 2013, and has standing purchase orders and open invoices with two customers. Management believes this funding will continue from its’ current investors and has also obtained funding from new investors. Management believes the existing shareholders, the prospective new investors and future revenue 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.
|
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.
Revenue Recognition
We recognize revenue upon delivery of equipment, provided that evidence of an arrangement exists, title, and risk of loss have passed to the customer, fees are fixed or determinable, and collection of the related receivable is reasonably assured. Title to the equipment is transferred to the customer once the last payment is received. We record revenue as it is received, and the equipment has been fully accepted by the customer. Returns are based upon each rent-to-own agreement, and revenue would be adjusted based on a pro-rata basis on the unused months of quarterly payments. Generally, we extend credit to our customers and do not require collateral. We do not ship a product until we have either a purchase agreement or rental agreement signed by the customer with a payment arrangement. This is a critical policy, because we want our accounting to show only sales which has a final payment arrangement.
We also recognize revenue for services associated with the equipment setup, provided it is part of the rent-to-own agreement.
Cash and Cash Equivalent
The Company considers all highly liquid investments with an original maturity of three months or less to be cash equivalents.
Loss per Share Calculations
Loss per Share dictates the calculation of basic earnings per share and diluted earnings per share. Basic earnings per share are computed by dividing income 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 the number of additional common shares that would have been outstanding if the potential common shares had been issued and if the additional common shares were dilutive. No shares for employee options or warrants were used in the calculation of the loss per share as they were all anti-dilutive. The Company’s diluted loss per share is the same as the basic loss per share for the three months ended March 31, 2013, as the inclusion of any potential shares would have had an anti-dilutive effect due to the Company generating a loss.
ORIGINOIL, INC.
NOTES TO FINANCIAL STATEMENTS
MARCH 31, 2013
|
2.
|
SUMMARY OF SIGNIFICANT ACCOUNTING POLICES (Continued)
|
Stock-Based Compensation
Share based payments applies to transactions in which an entity exchanges its equity instruments for goods or services, and also applies to liabilities an entity may incur for goods or services that are to follow a fair value of those equity instruments. We are required to follow a fair value approach using an option-pricing model, such as the Black Scholes option valuation model, at the date of a stock option grant. The deferred compensation calculated under the fair value method was amortized over the respective vesting period of the stock option.
Fair Value of Financial Instruments
Fair Value of Financial Instruments, requires disclosure of the fair value information, whether or not recognized in the balance sheet, where it is practicable to estimate that value. As of March 31, 2013, the balances reported for cash, prepaid expenses, accounts payable, accrued expenses, and derivative liability approximate the fair value because of their short maturities.
We adopted ASC Topic 820 (originally issued as SFAS 157, “Fair Value Measurements”) as of January 1, 2008 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 1measurements) 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.
|
We measure certain financial instruments at fair value on a recurring basis. Assets and liabilities measured at fair value on a recurring basis are as follows at March 31, 2012:
| |
|
Total
|
|
|
(Level 1)
|
|
|
(Level 2)
|
|
|
(Level 3)
|
|
|
Other Asset
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Investment
|
|
$ |
20,000 |
|
|
$ |
- |
|
|
$ |
- |
|
|
$ |
20,000 |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total assets measured at fair value
|
|
$ |
20,000 |
|
|
$ |
- |
|
|
$ |
- |
|
|
$ |
20,000 |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Liabilities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Derivative Liability
|
|
$ |
1,337,392 |
|
|
$ |
- |
|
|
$ |
- |
|
|
$ |
1,337,392 |
|
|
Unsecured Promissory Notes
|
|
|
110,000 |
|
|
|
- |
|
|
|
- |
|
|
|
110,000 |
|
|
Convertible Debenture, net of discount
|
|
|
1,119,841 |
|
|
|
- |
|
|
|
- |
|
|
|
1,119,841 |
|
|
Total liabilities measured at fair value
|
|
$ |
2,567,233 |
|
|
$ |
- |
|
|
$ |
- |
|
|
$ |
2,567,233 |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Reclassification
Amortization of debt discount for the three months ended March 31, 2013 and 2012, respectively, was reclassified as interest expense.
Recently Issued Accounting Pronouncements
Management reviewed accounting pronouncements issued during the three months ended March 31, 2013, and no pronouncements were adopted during the period.
ORIGINOIL, INC.
NOTES TO FINANCIAL STATEMENTS
MARCH 31, 2013
During the three months ended March 31, 2013, the Company issued 173,081 shares of common stock for services with prices ranging from $0.50 to $0.63 with a total fair value of $92,041; issued 245,638 shares of common stock of which 122,819 shares were associated with the settlement of a convertible promissory note for the principal amount of $100,000, and 122,819 upfront shares issued with the notes with a fair value of $79,832; issued 255,000 shares of common stock for the settlement of convertible promissory notes for the principal amount of $90,796, with the portion attributable to the derivative in the amount of $47,615, and a gain of $312; issued 254,911 shares of common stock in exchange for a cashless exercise of 254,911 purchase warrants; received proceeds for issuance of common stock for cash of $207,532 to purchase 830,126 shares of common stock at a price of $0.25 together with one (1) year warrants to purchase an aggregate of 400,000 shares of common stock and one (3) year warrants to purchase an aggregate of 400,000 shares of common stock.
The Board of Directors adopted the OriginOil, Inc., 2009 Incentive Stock Option Plan (the “2009 Plan”) for the purposes of granting stock options to its employees and others providing services to the Company, which reserves and sets aside for the granting of options for Five Hundred Thousand (500,000) shares of Common Stock. Options granted under the Plan may be either incentive options or nonqualified options and shall be administered by the Company's Board of Directors ("Board"). Each Option shall be exercisable to the nearest whole share, in installments or otherwise, as the respective option agreements may provide. Notwithstanding any other provision of the Plan or of any option agreement, each Option shall expire on the date specified in the option agreement, which date shall not be later than the tenth (10th) anniversary from the effective date of this option.
On May 25, 2012, the Board of Directors adopted a new OriginOil, Inc., 2012 Incentive Stock Option Plan (the “2012 Plan”) for the purposes of granting stock options to its employees and others providing services to the Company, which reserves and sets aside for the granting of options for One Million (1,000,000) shares of Common Stock. Options granted under the Plan may be either incentive options or nonqualified options and shall be administered by the Company's Board. Each Option shall be exercisable to the nearest whole share, in installments or otherwise, as the respective option agreements may provide. Notwithstanding any other provision of the Plan or of any option agreement, each Option shall expire on the date specified in the option agreement, which date shall not be later than the tenth (10th) anniversary from the effective date of this option.
During the three months ended March 31, 2013, the Company granted no stock options during the period.
A summary of the Company’s stock option activity and related information follows:
| |
|
March 31, 2013
|
|
| |
|
|
|
|
Weighted
|
|
| |
|
Number
|
|
|
average
|
|
| |
|
of
|
|
|
exercise
|
|
| |
|
Options
|
|
|
price
|
|
|
Outstanding, beginning of period
|
|
|
465,294 |
|
|
$ |
1.67 |
|
|
Granted
|
|
|
- |
|
|
|
- |
|
|
Exercised
|
|
|
- |
|
|
|
- |
|
|
Forfeited/Expired
|
|
|
- |
|
|
|
- |
|
|
Outstanding, end of period
|
|
|
465,294 |
|
|
$ |
1.67 |
|
|
Exercisable at the end of period
|
|
|
104,087 |
|
|
$ |
2.65 |
|
|
Weighted average fair value of
|
|
|
|
|
|
|
|
|
|
options granted during the period
|
|
|
|
|
|
$ |
- |
|
| |
|
|
|
|
|
|
|
|
ORIGINOIL, INC.
NOTES TO FINANCIAL STATEMENTS
MARCH 31, 2013
4. STOCKS AND WARRANTS (Continued)
The weighted average remaining contractual life of options outstanding issued under the 2009 Plan and 2012 Plan as of March 31, 2013 was as follows:
| |
|
|
|
|
|
|
|
|
Weighted
|
|
| |
|
|
|
|
|
|
|
|
Average
|
|
| |
|
|
Stock
|
|
|
Stock
|
|
|
Remaining
|
|
|
Exercisable
|
|
|
Options
|
|
|
Options
|
|
|
Contractual
|
|
|
Prices
|
|
|
Outstanding
|
|
|
Exercisable
|
|
|
Life (years)
|
|
| $ |
9.60 |
|
|
|
6,250 |
|
|
|
3,634 |
|
|
|
0.25 |
|
| $ |
6.90 |
|
|
|
209 |
|
|
|
84 |
|
|
|
0.25 |
|
| $ |
7.20 |
|
|
|
1,667 |
|
|
|
1,042 |
|
|
|
2.48 |
|
| $ |
4.50 |
|
|
|
33,334 |
|
|
|
19,445 |
|
|
|
2.65 |
|
| $ |
6.00 |
|
|
|
16,500 |
|
|
|
8,250 |
|
|
|
2.73 |
|
| $ |
4.20 |
|
|
|
13,334 |
|
|
|
4,861 |
|
|
|
3.30 |
|
| $ |
5.15 |
|
|
|
10,000 |
|
|
|
3,438 |
|
|
|
3.38 |
|
| $ |
1.70 |
|
|
|
4,000 |
|
|
|
1,250 |
|
|
|
3.51 |
|
| $ |
0.89 |
|
|
|
60,000 |
|
|
|
11,250 |
|
|
|
9.26 |
|
| $ |
0.89 |
|
|
|
200,000 |
|
|
|
33,333 |
|
|
|
9.34 |
|
| $ |
0.89 |
|
|
|
120,000 |
|
|
|
17,500 |
|
|
|
9.43 |
|
| |
|
|
|
|
465,294 |
|
|
|
104,087 |
|
|
|
|
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Stock-based compensation expense recognized during the period is based on the value of the portion of stock-based payment awards that is ultimately expected to vest. Stock-based compensation expense recognized in the financial statements of operations during the three months ended March 31, 2013, included compensation expense for the stock-based payment awards granted prior to, but not yet vested, as of March 31, 2013 based on the grant date fair value estimated, and compensation expense for the stock-based payment awards granted subsequent to March 31, 2013, based on the grant date fair value estimated. We account for forfeitures as they occur. The stock-based compensation expense recognized in the statement of income during the three months ended March 31, 2013 and 2012 is $30,644 and $87,410, respectively.
Warrants
A summary of the Company’s warrant activity and related information follows:
| |
|
|
|
|
|
|
| |
|
March 31, 2013
|
|
| |
|
|
|
|
Weighted
|
|
| |
|
|
|
|
average
|
|
| |
|
|
|
|
exercise
|
|
| |
|
Options
|
|
|
price
|
|
|
Outstanding -beginning of year
|
|
|
7,098,104 |
|
|
$ |
0.79 |
|
|
Granted
|
|
|
953,847 |
|
|
|
0.31 |
|
|
Exercised
|
|
|
- |
|
|
|
- |
|
|
Forfeited
|
|
|
- |
|
|
|
- |
|
|
Outstanding - end of year
|
|
|
8,051,951 |
|
|
$ |
0.77 |
|
| |
|
|
|
|
|
|
|
|
ORIGINOIL, INC.
NOTES TO FINANCIAL STATEMENTS
MARCH 31, 2013
4. STOCKS AND WARRANTS (Continued)
At March 31, 2013, the weighted average remaining contractual life of warrants outstanding:
| |
|
|
|
|
|
|
|
|
Weighted
|
|
| |
|
|
|
|
|
|
|
|
Average
|
|
| |
|
|
|
|
|
|
|
|
Remaining
|
|
|
Exercisable
|
|
|
Warrants
|
|
|
Warrants
|
|
|
Contractual
|
|
|
Prices
|
|
|
Outstanding
|
|
|
Exercisable
|
|
|
Life (years)
|
|
| $ |
9.30 |
|
|
|
223,338 |
|
|
|
223,338 |
|
|
|
1.25 |
|
| $ |
10.20 |
|
|
|
28,335 |
|
|
|
28,335 |
|
|
|
1.38 |
|
| $ |
9.00 |
|
|
|
9,168 |
|
|
|
9,168 |
|
|
|
1.56 |
|
| $ |
8.70 |
|
|
|
3,334 |
|
|
|
3,334 |
|
|
|
1.62 |
|
| $ |
8.40 |
|
|
|
667 |
|
|
|
667 |
|
|
|
1.83 |
|
| $ |
8.70 |
|
|
|
5,000 |
|
|
|
5,000 |
|
|
|
2.16 |
|
| $ |
5.70 |
|
|
|
7,334 |
|
|
|
7,334 |
|
|
|
2.35 |
|
| $ |
4.50 |
|
|
|
3,334 |
|
|
|
3,334 |
|
|
|
2.45 |
|
| $ |
4.20 |
|
|
|
8,334 |
|
|
|
8,334 |
|
|
|
2.48 |
|
| $ |
4.20 |
|
|
|
33,334 |
|
|
|
33,334 |
|
|
|
2.50 |
|
| $ |
3.60 |
|
|
|
8,334 |
|
|
|
8,334 |
|
|
|
2.58 |
|
| $ |
4.50 |
|
|
|
33,334 |
|
|
|
33,334 |
|
|
|
2.65 |
|
| $ |
4.20 |
|
|
|
13,335 |
|
|
|
13,335 |
|
|
|
2.67 |
|
| $ |
6.00 |
|
|
|
133,334 |
|
|
|
133,334 |
|
|
|
2.73 |
|
| $ |
6.00 |
|
|
|
33,334 |
|
|
|
33,334 |
|
|
|
2.75 |
|
| $ |
6.30 |
|
|
|
8,334 |
|
|
|
8,334 |
|
|
|
2.97 |
|
| $ |
5.70 |
|
|
|
4,001 |
|
|
|
4,001 |
|
|
|
3.00 |
|
| $ |
6.90 |
|
|
|
33,334 |
|
|
|
33,334 |
|
|
|
3.21 |
|
| $ |
6.90 |
|
|
|
33,334 |
|
|
|
33,334 |
|
|
|
3.46 |
|
| $ |
1.90 |
|
|
|
80,000 |
|
|
|
80,000 |
|
|
|
3.52 |
|
| $ |
6.90 |
|
|
|
33,334 |
|
|
|
33,334 |
|
|
|
3.71 |
|
| $ |
1.47 |
|
|
|
260,000 |
|
|
|
260,000 |
|
|
|
4.07 |
|
| $ |
0.65 |
|
|
|
80,000 |
|
|
|
80,000 |
|
|
|
4.36 |
|
| $ |
0.65 |
|
|
|
20,000 |
|
|
|
20,000 |
|
|
|
4.55 |
|
| $ |
0.65 |
|
|
|
50,000 |
|
|
|
50,000 |
|
|
|
4.83 |
|
| $ |
0.89 |
|
|
|
100,000 |
|
|
|
100,000 |
|
|
|
9.64 |
|
| $ |
0.25 |
|
|
|
1,000,000 |
|
|
|
1,000,000 |
|
|
|
0.96 - 2.97 |
|
| $ |
0.65 |
|
|
|
5,805,765 |
|
|
|
5,805,765 |
|
|
|
0.25 - 4.75 |
|
| |
|
|
|
|
8,051,951 |
|
|
|
8,051,951 |
|
|
|
|
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
During the three months ended March 31, 2013, the Company granted to an investor warrants to purchase an aggregate of 153,847 shares of common stock associated with a promissory note in the amount of $100,000. Also, during the period ended March 31, 2013 through a private placement, the Company granted 800,000 common stock purchase warrants with the purchase of 400,000 shares of common stock for proceeds received of $100,000. In addition to the warrants mentioned above, as of December 31, 2012 there were 456,471 common stock purchase warrants for investors of which 254,911 were exercised through cashless exercise. The number of total outstanding warrants to purchase shares of the Company’s common stock as of March 31, 2013, was 8,253,511.
|
5.
|
UNSECURED PROMISSORY NOTES
|
January 2012 Notes
As of December 31, 2012, the January 2012 Notes had a remaining aggregate principal amount outstanding of $210,000. The Note holder is entitled to one additional share of common stock for each share converted. The Company issued 122,819 shares of common stock in conversion of principal in the amount of $100,000 plus interest in the amount of $7,467, with 122,819 upfront shares for a fair value of $79,832. The aggregate principal amount outstanding at March 31, 2013 was $110,000.
|
6.
|
SECURITIES PURCHASE AGREEMENTS
|
On June 20, 2012, the Company received an initial advance of $100,000 in consideration for the issuance of a note in the principal amount of $400,000 on a securities purchase agreements entered into for the sale of a 10% convertible promissory note, with an aggregate sum of $400,000, plus warrants to purchase an aggregate of up to 615,384 shares of the Company’s common stock at a purchase price of $0.65 per share. At closing, which took place simultaneously with execution of the securities purchase agreement, the Company issued the Note with an outstanding principal sum of $100,000 together with a warrant to purchase 153,846 shares of the Company’s common stock.
ORIGINOIL, INC.
NOTES TO FINANCIAL STATEMENTS
MARCH 31, 2013
|
6.
|
SECURITIES PURCHASE AGREEMENTS (Continued)
|
Under the terms of the securities purchase agreement, the investor had the option to purchase an additional $300,000 in principal under the Note and receive further warrants to purchase an aggregate of up to 461,538 shares of the Company’s common stock.
The Note originally matured six months from the date of each purchase made under the Note, and bore interest at a rate of 10% per annum, which increased to 15% when the Note was not repaid by September 18, 2012. The Note was originally convertible into shares of the Company’s common stock at a conversion price of $0.65. The warrants may be exercised at any time for a period of four years from the date of issuance at an exercise price of $0.65. On February 15, 2013, the Company and the lender entered into an amendment to the Note providing for, among other things, an extension of the maturity date of the Note until July 21, 2013 and the amendment of the conversion price of the Note to the lesser of $0.65 or 70% of the average of the three lowest closing prices in the 25 trading days previous to a conversion, subject to, at the election of the Company, a conversion floor of $0.4375. If the Company elected to enforce the conversion floor it was required to make a cash payment to cover the conversion loss in an amount as set forth in the amendment. The conversion floor terminated in the event the Company issued or entered into an agreement providing for the issuance of shares at a price below the conversion floor. The conversion floor subsequently terminated.
On February 20, 2013, the lender advanced another $100,000 under the securities purchase agreement, bringing the total outstanding principal due under the Note to $200,000. Simultaneous therewith, the Company issued to the lender a warrant to purchase 153,846 shares of the Company's common stock.
ASC Topic 815 provides guidance applicable to the convertible debt issued by the Company in instances where debt has embedded conversion options and net settlement. For example, when a convertible debt converts at a discount to market based on the stock price on the date of conversion, ASC Topic 815 requires that the embedded conversion option of the convertible debt be bifurcated from the host contract and recorded at their fair value. In accounting for derivatives under accounting standards, the Company recorded a liability of $71,410 representing the estimated present value of the conversion feature considering the historic volatility of the Company’s stock, and a discount of $71,410 representing the imputed interest associated with the embedded derivative. The discount was amortized over the life of the convertible debt, and resulted in the recognition of $7,086 in interest expense for the three months ended March 31, 2013.
The derivative liability is adjusted periodically according to the Company’s stock price fluctuations. For purpose of determining the fair market value of the derivative liability for the embedded conversion, the Company used Black Scholes option valuation model. The significant assumptions used in the Black Scholes valuation of the derivative are as follows:
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Risk free interest rate
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.11% - .14 |
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Stock volatility factor
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40.77% - 66.35 |
% |
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Weighted average expected option life
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6 months - 13 months
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Expected dividend yield
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None
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The value of the derivative liability at March 31, 2013 was $73,147.
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7.
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CONVERTIBLE PROMISORY NOTES
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Between January 1, 2013 and March 31, 2013, the Company issued convertible promissory notes (the “OID Notes”) to various investors in an aggregate principal amount of $313,332, with an Original Issue Discount (OID) of $78,332.
The Convertible Notes were originally convertible into the common stock of the Company at conversion prices ranging from $0.4375 to $0.65. As a result of most favored nations protection accorded to the Convertible Notes, the conversion price of the Convertible Notes is the lesser of $0.50 (subject to adjustment for stock splits, dividends, combinations and other similar transactions) or 50% of the lowest trade price of common stock on any trading day after issuance of the Convertible Notes.
The maturity dates of the Notes are ninety (90) days from their effective date, with a one-time interest charge of $31,332, which will be amortized over ninety (90) days and recorded as interest expense. If the Convertible Notes are not repaid on maturity, then the maturity date shall be automatically extended for up to three further 30 day periods and an extension fee of 25% of the then outstanding principal, interest and other fees shall be added to the principal amount of the Notes at the end of each 30 day period that the Convertible Notes are still outstanding. During the three months ended March 31, 2013, the Company incurred $358,187 in commitment fees to extend outstanding notes payable which has been added to the principal balance owed. In the event of default under the Convertible Notes, the Company shall be required to repay a mandatory default amount in cash equal to 200% of the outstanding principal amount of the Notes plus accrued and unpaid interest and other fees due thereon and such mandatory default amount shall bear interest at 10% per annum.
ORIGINOIL, INC.
NOTES TO FINANCIAL STATEMENTS
MARCH 31, 2013
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7.
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CONVERTIBLE PROMISORY NOTES (Continued)
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Convertible Notes issued in February and March, 2013 provide that for as long as the Convertible 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 Convertible Notes or such other convertible notes or a term was not similarly provided to the purchaser of the Convertible Notes or such other convertible notes, then such more favorable or additional term shall, at the purchaser’s option, become part of the Convertible Notes and such other convertible notes.
ASC Topic 815 provides guidance applicable to the convertible debt issued by the Company in instances where debt has embedded conversion options and net settlement. For example, when a convertible debt converts at a discount to market based on the stock price on the date of conversion, ASC Topic 815 requires that the embedded conversion option of the convertible debt be bifurcated from the host contract and recorded at their fair value. In accounting for derivatives under accounting standards, the Company recorded a liability of $428,265 representing the estimated present value of the conversion feature considering the historic volatility of the Company’s stock, and a discount of $235,000 representing the imputed interest associated with the embedded derivative. The discount was amortized over the life of the convertible debt, and resulted in the recognition of $107,583 in interest expense for the three months ended March 31, 2013.
The derivative liability is adjusted periodically according to the Company’s stock price fluctuations. For purpose of determining the fair market value of the derivative liability for the embedded conversion, the Company used Black Scholes option valuation model. The significant assumptions used in the Black Scholes valuation of the derivative are as follows:
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Risk free interest rate
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.06% - .11 |
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Stock volatility factor
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37.24% - 56.83 |
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Weighted average expected option life
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6 months
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Expected dividend yield
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None
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The value of the derivative liability at March 31, 2013 was $1,264,245.
Management evaluated subsequent events as of the date of the financial statements pursuant to ASC TOPIC 855, and reported the following:
On February 15, 2013, the Company commenced a private placement offering of up to 12,000,000 shares of common stock together with up to three series of warrants to purchase up to an aggregate of 36,000,000 shares of common stock. From April 1 to May 15, 2013, the Company sold to accredited investors and to three non-U.S. persons 4,520,000 shares of its common stock together with one-year warrants to purchase an aggregate of 4,400,000 shares of its common stock, three-year warrants to purchase an aggregate of 4,400,000 shares of its common stock and five-year warrants to purchase 8,000,000 shares of its common stock for aggregate gross proceeds of $730,000. Each of the warrants is exercisable at a price per share between $0.15 and $0.25 subject to adjustment for stock splits, dividends, distributions, recapitalizations and the like.
On April 12, 2013, in recognition of the CEO’s contributions to the Company in 2012, the Board of Directors awarded to the CEO a five-year option to purchase 759,645 shares of common stock exercisable at $0.43 per share.
On April 12, 2013, holders of original issuance discount convertible promissory notes issued in October 2012 in the aggregate principal amount of $125,000 plus interest and extension fees of $233,066 were converted into an aggregate of 1,432,285 shares of common stock.
On April 18, 2013, the Company issued a five-year warrant to purchase up to 124,000 shares of its common stock exercisable at $0.25 per share to a consultant.
On April 30, 2013, a holder of a convertible note, known in the Company’s filings with the SEC as the “January Notes” or “January 2012 Notes” converted an aggregate outstanding principal amount of $100,000 plus accrued and unpaid interest of $8,667 into an aggregate of 248,382 shares of common stock of the Company.
ORIGINOIL, INC.
NOTES TO FINANCIAL STATEMENTS
MARCH 31, 2013
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8.
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SUBSEQUENT EVENTS (Continued)
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On April 30, 2013, a holder of a convertible promissory note issued on June 20, 2012, converted an aggregate principal and interest amount of $24,204 into 87,909 shares of the Company's common stock.
On May 1, 2013, the Company issued Convertible Notes (“Notes”) in an aggregate principal amount of $125,000. The Notes mature six months from the date of issuance and bear interest at 10% per annum. The Notes may be converted into shares of the Company’s common stock at a conversion price of the lesser of $0.50 (subject to adjustment for stock splits, dividends, combinations and other similar transactions) or 50% of the lowest trade price on any trade day following issuance of the Notes. The Notes include customary default provisions related to payment of principal and interest and bankruptcy or creditor assignment. In the event of default under the Notes, the Company shall be required to repay a mandatory default amount in cash equal to 150% of the outstanding principal amount of the Notes plus accrued and unpaid interest and other fees due thereon and such mandatory default amount shall bear interest at 10% per annum. In addition, for as long as the Notes or other convertible notes in effect between the purchaser and the Company are outstanding, if the Company issues any security with terms more favorable than the terms of the Notes or such other convertible notes or a term was not similarly provided to the purchaser of the Notes or such other convertible notes, then such more favorable or additional term shall, at the purchaser’s option, become part of the Notes and such other convertible notes.
During the subsequent period through May 15, 2013, the Company issued 783,846 shares of common stock for services at fair value of $353,269.
This Form 10-Q contains forward-looking statements that are subject to a number of risks and uncertainties, many of which are beyond our control, which may include statements about our:
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business strategy;
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financial strategy;
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intellectual property;
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production;
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future operating results; and
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plans, objectives, expectations and intentions contained in this report that are not historical.
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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
OriginOil, Inc. (“we”, “us”, “our”, the “Company” or “OriginOil”) was incorporated on June 1, 2007 under the laws of the State of Nevada. We have only been engaged in our current and proposed business operations since June 2007, and to date, we have been primarily involved in research and development activities. Our principal offices are located at 5645 West Adams Blvd., Los Angeles, California 90016. Our telephone number is (323) 939-6645. Our website address is www.originoil.com. Our website and the information contained on our website are not incorporated into this quarterly report.
Overview of Business
OriginOil has developed an energy production process for harvesting algae and cleaning up oil and gas water. Operating at the first stage of extraction, this high-speed and chemical-free process can be embedded in other systems to improve performance. Originally invented to solve the biggest problem in algae production, it is now finding demand in oil and gas fracking and production water cleanup, an immediate and fast-growing market that desperately needs clean technology solutions. OriginOil is a pure technology company. We are neither a producer nor a service company. We intend to embed our technology into the systems others build and sell through joint ventures, private labeling and licensing agreements.
Algae Harvesting Application
The OriginOil System is designed to control the harvesting of algae, and intended to result in a concentrate which can be either converted by other companies into bio-oil, bio-gas or bio-carbon for refining into fuel and chemicals, or further processed by other companies into valuable products.
Oil and Gas Water Cleanup Application
When applied to the oil and gas industry, OriginOil’s process is used continuously to remove oils, suspended solids, insoluble organics and bacteria from produced and ‘frac flowback’ water. Testing using fluid imaging has reported a 99.9% reduction in free oil and a 99.5% reduction in suspended solids.
Business Model For All Applications
At this early stage, to prove our systems for wide-scale distribution and licensing, we must build, sell and support our system to companies making use of such systems.
Our long-term business model is based on licensing this technology to distributors, manufacturers, engineering service firms, and specialty operators, as well as fuel refiners, chemical and oil companies. We are not in the business of producing and marketing oil or fuel as an end product, nor of developing sales distribution networks or engaging in volume manufacturing.
We have only been engaged in our current and proposed business operations since June 2007. While continuing to engage in research and development, we have begun to make our first sales and licensing agreements.
Recent Developments
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On February 5, 2013, we announced that we partnered with an aquaculture producer to study the impact of their technology in transforming a $100 billion global market.
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On February 13, 2013 we announced that we strengthened our focus on frack water cleanup and launched a licensing group to accelerate commercialization in secondary markets.
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On February 28, 2013 we announced that our CLEAN-FRAC™ water treatment system yields successful first field results.
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On March 13, 2013 we announced that we teamed up with another California startup to challenge Halliburton’s costs for cleaning produced water and frack water.
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On April 2, 2013 we announced that we accelerated commercialization of our CLEAN-FRAC system with the first commercial unit planned for 3rd quarter.
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On April 26, 2013 we announced that we enhanced third party testing showing 99% oil and solids removal, further validating our CLEAN-FRAC process.
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On May 9, 2013 we announced that Garden State bioEnterprises adopted our technology for high-value astaxanthin harvesting.
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On May 15, 2013 we announced that we named a manufacturer for our new performance-based frack water cleanup program.
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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.
Use of Estimates
The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the amounts reported in the accompanying financial statements. Significant estimates made in preparing these financial statements include the estimate of useful lives of property and equipment, the deferred tax valuation allowance, and the fair value of stock options. Actual results could differ from those estimates.
Fair Value of Financial Instruments
Fair value of financial instruments requires disclosure of the fair value information, whether or not recognized in the balance sheet, where it is practicable to estimate that value. As of March 31, 2013, the amounts reported for cash, prepaid expenses, accounts payable and accrued expenses approximate the fair value because of their short maturities.
Recently Issued Accounting Pronouncements
Management reviewed accounting pronouncements issued during the three months ended March 31, 2013, and no pronouncements were adopted during the period.
Results of Operation
Results of Operations for the three months ended March 31, 2013 compared to the three months ended March 31, 2012.
Revenue and Cost of Sales
Revenue for the three months ended March 31, 2013 and 2012 was $0 and $538,163, respectively. Cost of sales for the three months ended March 31, 2013 and 2012 were $0 and $386,091, respectively. We had two equipment sales pending as of March 31, 2013 totaling $100,000 which are expected to be recognized in the second quarter of 2013.
To date we have had minimal revenues due to our focus on product development and testing. In addition, our equipment sales are primarily for trial purposes, intended for licensing or private labeling type transactions, which we believe have the potential to yield stronger long term revenue.
Operating Expenses
Selling and General Administrative Expenses
Selling and general administrative (“SG&A”) expenses decreased by $(383,389) to $723,828 for the three months ended March 31, 2013, compared to $1,107,217 for the three months ended March 31, 2012. The majority of the decrease in SG&A expenses was due primarily to a decrease in marketing and legal expenses.
Research and Development Cost
Research and development (“R&D”) cost decreased by $(37,940) to $212,775 for the three months ended March 31, 2013, compared to $250,715 for the three months ended March 31, 2012. The decrease in overall R&D costs was primarily due to a decrease in employee salaries and outside services for algae appliances and fracking research.
Net Loss
Our net loss increased by $(859,084) to $(2,647,476) for the three months ended March 31, 2013, compared to $(1,788,392) for the three months ended March 31, 2012. The majority of the increase in net loss was due primarily to the increase in other expenses of $1,139,227, which consisted of accounting for the increase in net loss on change in derivative valuation in the amount of $(625,603), an increase in convertible note commitment fees of $(358,187), an increase in loss on settlement of debt in the amount of $(79,520), an increase in amortization of debt discount and original issue discount of $(82,873), a decrease in loss on foreign exchange of $1,182, offset by a decrease in gross profit of $(152,072) and general administrative and research and development expenses of $394,275 and $37,940 respectively. Currently operating costs exceed revenue because sales are not yet sufficient to cover costs. We cannot assure of when or if revenue will exceed operating costs.
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.
At March 31, 2013 and December 31, 2012, we had cash of $257,923 and $507,355, respectively and working capital deficit of $(2,917,488) and $(936,099), respectively. The increase in working capital deficit was primarily due to the increase in accounts payable, accrued expenses, deferred income, convertible promissory notes and derivative liability.
During the first quarter of 2013, we raised an aggregate of $335,000 in an offering of unsecured convertible notes and $207,533 in an offering of shares of our common stock and warrants. Since April 1, 2013 through May 17, 2013, we raised an aggregate of $125,000 in an offering of unsecured convertible notes and $730,000 in an offering of shares of our common stock and warrants. The opinion of our independent registered public accounting firm on our audited financial statements as of and for the year ended December 31, 2012 contains an explanatory paragraph regarding substantial doubt about our ability to continue as a going concern. Our ability to continue as a going concern is dependent upon raising capital from financing transactions and future revenue.
Net cash used in operating activities was $(739,910) for the three months ended March 31, 2013, compared to $(878,464) for the prior period March 31, 2012. The decrease of $(138,554) in cash used in operating activities was primarily due to the net increase in prepaid expenses, work in progress, accounts payable, accrued expenses and net loss. The net loss includes non-cash expenses of depreciation, stock issued for services, loss on change in valuation of derivative liability, debt discount and original issue discount, commitment fees and stock compensation expense. Currently, operating costs exceed revenue because sales are not yet significant.
Net cash flows used in investing activities for the three months ended March 31, 2013 and 2012 were $(52,055) and $0, respectively. The net increase in cash used in investing activities was due to an increase in patent expenditures and research equipment.
Net cash flows provided by financing activities was $542,533 for the three months ended March 31, 2013, as compared to $910,329 for the prior period March 31, 2012. The decrease in cash provided by financing activities was due to a decrease in debt financing. To date we have principally financed our operations through the sale of our common stock and the issuance of debt.
We do not have any material commitments for capital expenditures during the next twelve months. Although our proceeds from the issuance of convertible debt, our offering of shares of common stock and warrants together with revenue from operations are currently sufficient to fund our operating expenses, we will need to raise additional funds in the future so that we can expand our operations. Therefore, our future operations are dependent on our ability to secure additional financing. Financing transactions may include the issuance of equity or debt securities, obtaining credit facilities, or other financing mechanisms. However, the trading price of our common stock and a downturn in the U.S. equity and debt markets could make it more difficult to obtain financing through the issuance of equity or debt securities. Even if we are able to raise the funds required, it is possible that we could incur unexpected costs and expenses, fail to collect significant amounts owed to us, or experience unexpected cash requirements that would force us to seek alternative financing. Furthermore, if we issue additional equity or debt securities, stockholders may experience additional dilution or the new equity securities may have rights, preferences or privileges senior to those of existing holders of our common stock. The inability to obtain additional capital may restrict our ability to grow and may reduce our ability to continue to conduct business operations. If we are unable to obtain additional financing, 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 over the next nine months, due to our cash on hand, our ability to raise money from our investor base and future revenue. Based on the aforesaid, we believe we have the ability to continue our operations for the foreseeable future and will be able to realize assets and discharge liabilities in the normal course of operations.
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.
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.
Evaluation of Disclosure Controls and Procedures
We have adopted and maintain disclosure controls and procedures (as such term is defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as amended (the “Exchange Act”)) that are designed to ensure that information required to be disclosed in our reports under the Exchange Act, is recorded, processed, summarized and reported within the time periods required under the SEC’s rules and forms and that the information is gathered and communicated to our management, including our Chief Executive Officer (Principal Executive Officer and Principal Financial Officer), as appropriate, to allow for timely decisions regarding required disclosure.
As required by SEC Rule 15d-15(b), our Chief Executive Officer and Chief Financial Officer carried out an evaluation under the supervision and with the participation of our management, of the effectiveness of the design and operation of our disclosure controls and procedures pursuant to Exchange Act Rule 15d-14 as of the end of the period covered by this report. Based on the foregoing evaluation, our Chief Executive Officer and Chief Financial Officer concluded that our disclosure controls and procedures are effective in timely alerting them to material information required to be included in our periodic SEC filings and to ensure that information required to be disclosed in our periodic SEC filings is accumulated and communicated to our management, including our Chief Executive Officer and Chief Financial Officer, to allow timely decisions regarding required disclosure about our internal control over financial reporting.
Changes in Internal Controls
There have been no changes in our internal control over financial reporting during the most recent fiscal quarter ended March 31, 2013 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.
PART II
None.
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.
None.
None.
Not applicable.
(a) The following disclosure would have otherwise been filed on Form 8-K under the heading “Item 3.02 Unregistered Sales of Equity Securities”:
As previously disclosed in our Current Report on Form 8-K filed with the SEC on March 19, 2013 and May 7, 2013 and our Annual Report on 10-K filed with the SEC on April 16, 2013, on February 15, 2013, we commenced a private placement offering, as subsequently amended, of up to 12,000,000 shares of common stock together with up to four series of warrants to purchase up to an aggregate of 48,000,000 shares of common stock.
From May 7, 2013 to May 16, 2013, we sold to an accredited investor and a non-U.S. person 2,100,000 shares of our common stock together with one-year warrants to purchase an aggregate of 2,000,000 shares of our common stock, three-year warrants to purchase an aggregate of 2,000,000 shares of our common stock and five-year warrants to purchase an aggregate of 4,000,000 shares of our common stock, for aggregate gross proceeds of $325,000. Each of the warrants is exercisable at a price per share of $0.15 subject to adjustment for stock splits, dividends, distributions, recapitalizations and the like.
The securities offered will not be and have not been registered under the Securities Act of 1933, as amended (the “Securities Act”) and may not be offered or sold in the United States absent registration or an applicable exemption from registration requirements. This Current Report on Form 8-K shall not constitute an offer to sell or the solicitation of an offer to buy, nor shall there be any sale of these securities in any state in which such offer, solicitation or sale would be unlawful prior to the registration or qualification under the securities laws of any such state.
Except as set forth below, the securities above were offered and sold pursuant to an exemption from the registration requirements under Section 4(2) of the Securities Act and Rule 506 of Regulation D promulgated thereunder since, among other things, the transactions did not involve a public offering and the securities were acquired for investment purposes only and not with a view to or for sale in connection with any distribution thereof. We issued securities to one non- U.S. person in an offshore transaction relying on Regulation S.
(b) Director Nomination Procedures
We do not have a standing nominating committee nor are we required to have one. We do not have any established procedures by which security holders may recommend nominees to our Board of Directors, however, any suggestions on directors, and discussions of board nominees in general, is handled by the entire Board of Directors.
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Exhibit Number
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Description of Exhibit
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101.INS
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XBRL Instance Document.*
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101.SCH
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XBRL Taxonomy Extension Schema.*
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101.CAL
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XBRL Taxonomy Extension Calculation Linkbase.*
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101.DEF
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XBRL Taxonomy Extension Definition Linkbase.*
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101.LAB
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XBRL Taxonomy Extension Label Linkbase.*
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101.PRE
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XBRL Extension Presentation Linkbase.*
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*
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Attached as Exhibit 101 to this report are the following financial statements from the Company’s Quarterly Report on Form 10-Q for the quarter ended March 31, 2013 formatted in XBRL (eXtensible Business Reporting Language): (i) the Balance Sheets, (ii) the Statement of Operations, (iii) the Statement of Shareholders’ Equity, (iv) the Statement of Cash Flow, and (v) Notes to Financial Statements. The XBRL-related information in Exhibit 101 to this Quarterly Report on Form 10-Q shall not be deemed “filed” or as part of a registration statement or prospectus for purposes of Sections 11 or 12 of the Securities Act of 1933, as amended and is not filed for purposes of Section 18 of the Securities Exchange Act of 1934, as amended, or otherwise subject to the liabilities of those sections.
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In accordance with the requirements of the Exchange Act, the registrant caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
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ORIGINOIL, INC.
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By:
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/s/ T Riggs Eckelberry
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T Riggs Eckelberry
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Chief Executive Officer (Principal Executive Officer)
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and Acting Chief Financial Officer (Principal Accounting and Financial Officer)
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May 20, 2013
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20